Ahead of Nike‘s anticipated fourth quarter earnings report next week, analysts are highlighting key factors that will impact how the market reacts.
Amid a generally turbulent retail environment this quarter, analysts are watching for updates regarding Nike’s inventory position, wholesale performance and the broader business in North America. Nike raised its outlook for fiscal year 2023 after better-than-expected results in the third quarter, and now expects reported revenue to grow in the high single-digits, up from the prior guidance of mid-single-digits. In Q4, revenues are expected to grow in the flat to low single-digits.
As for fiscal year 2024, Nike’s guidance will likely depend on its ability resolve some current outstanding issues weighing its business. According to UBS analyst Jay Sole, a weakening macro backdrop in North America and a less-than-robust sales rebound in China will likely lead Nike to announce a weaker-than-expected outlook for fiscal year 2024.
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“If North America has slowed down more than we realize, it would likely also negatively impact gross margin,” Sole wrote in a recent note to investors. As for inventory, Sole says it is likely Nike’s inventory position will “improve sequentially.”
“We still think Nike’s inventory position will get better, but excess footwear [stock] in the U.S. is probably a reason Nike’s inventory growth rate won’t look great,” Sole wrote.
In December, Nike CEO and president John Donahoe said he believed the company had overcome the peak of its inventory excesses after using markdowns, promotions and the wholesale channel to liquidate inventory. But inventories still grew 16% year-over-year in Q3.
Across sporting goods, inventory levels are not expected to normalize until late 2023 or earlier 2024, wrote Morgan Stanley analyst Alex Straton in a note to investors this week.
“Nike is not excluded from this industry dynamic, which leads us to suspect Nike may report elevated inventory levels exiting fiscal 2023,” Straton wrote. “This would stand in contrast to Nike’s hopes of entering 2024 clean.”
Still, if the Swoosh comes out with a detailed plan, it could save the market from reacting poorly, Straton added.
A generally sluggish wholesale environment could also have an impact. In recent weeks, retailers such as Macy’s and DSW have announced renewed wholesale partnerships with Nike. At the same time, many of these retailers have reported sales declines across their businesses as consumers pull back their spending on discretionary items.
According to Wedbush analyst Tom Nikic, Nike won’t suffer the consequences of the wholesale slowdown, as many of its partners have had mainly upbeat sentiments about the brand recently.
“Commentary from wholesale partners, while mixed overall in tone, has not been nearly as draconian as investor sentiment would seem, particularly on the higher end of the distribution spectrum,” Nikic noted. “In fact, most of Nike’s large North American wholesale partners had positive commentary about Nike sell-throughs.”
If the wholesale slowdown does happen to weigh on Nike this quarter, other wins could balance out these losses, said Baird analyst Jonathan Komp in a note this week.
“The broader gross margin and China recovery opportunity provide good earnings visibility,” Komp wrote. “In our view, Nike remains attractive given positive brand momentum and competitive positioning, high operating margin (low earnings sensitivity) and more reasonable valuation.”
Nike is set to report earnings for the fourth quarter and full year on June 29.
