Is Nike Stock A Sell Before Upcoming Earnings? (NYSE:NKE)

Elevator Pitch

I have a Hold investment rating for Nike, Inc.’s (NYSE:NKE) shares. In my earlier article for NKE published on September 14, 2021, I touched on the company’s “supply chain issues” and its “DTC or Direct-to-Consumer sales.” I focus my attention on Nike’s upcoming Q4 FY 2022 (YE May 31) earnings in this latest update.

Nike stock seems like a Sell before upcoming earnings, because its bottom line is expected to fall short of market expectations. However, I think NKE is more deserving of a Hold rating after considering both its decent long-term growth outlook and its reasonably fair valuations.

NKE Stock Key Metrics

Before doing a preview of Nike’s fourth-quarter earnings, it is necessary to review NKE’s recent third-quarter performance first.

In my view, Q3 FY 2022 was a mixed quarter for Nike based on an analysis of certain key metrics.

On the negative side of things, supply chain disruptions and downward pressure on future pricing are key concerns.

At the company’s Q3 FY 2022 results briefing on March 21, 2022, NKE disclosed that its transit times in the recent quarter were two weeks and six weeks longer as compared to what they were for Q3 FY 2021 and prior to COVID-19, respectively. It appears that supply chain disruptions will still remain as a headwind for Nike in the foreseeable future.

Nike also revealed at its third-quarter earnings call that due to a “lack of supply, we’ve got a couple of our geographies with full price realization that’s well above our definition of 65% for full marketplace health.” This could possibly translate into lower pricing and weaker gross profit margins for NKE in the quarters ahead.

On the positive side of things, NKE’s Greater China market and digital revenue for the recent quarter were above expectations.

Nike’s Greater China business turned around from a -24% (on a constant currency basis) YoY sales decline in the second quarter of fiscal 2022 to achieve a much narrower -8% (adjusted for foreign exchange effects) YoY revenue contraction in Q3 FY 2022. This was also much better than the Wall Street analysts’ consensus third-quarter China revenue growth forecast of -14% as per S&P Capital IQ.

Separately, the company’s NIKE brand digital sales grew by a strong +22% (adjusted for foreign exchange effects) YoY in the most recent quarter. NKE emphasized at its Q3 FY 2022 results call that “we earn a higher gross margin on our sales through the digital channels.” Nike also stressed that digital sales is a key driver to support a “high teens operating profit (growth for the company) over the multiyear period.”

In the subsequent sections of the article, I will evaluate Nike’s short-term and long-term outlook, and its valuations.

When Does Nike Report Earnings?

Nike will report the company’s earnings for the fourth quarter of fiscal 2022 on Monday, June 27, 2022, as per its announcement on May 24, 2022.

I discuss the expectations for NKE’s upcoming earnings in the next section.

What To Expect From Earnings

A recent June 21, 2022 Seeking Alpha News article highlighted that the sell-side analysts are “divided on calling” Nike’s upcoming Q4 FY 2022 earnings “a beat or miss.” This is validated by the wide range of earnings per share or EPS estimates for NKE. The most bearish analyst thinks that Nike’s EPS will decrease by -30% YoY from $0.93 in Q4 FY 2021 to $0.65 in Q4 FY 2022. In contrast, the most bullish analyst is of the view that NKE will still be able to deliver positive growth with its EPS increasing by +2% YoY to $0.95 in the fourth quarter.

The consensus Q4 FY 2022 EPS forecast for Nike is $0.81 at the time of writing. My projections point to NKE achieving an EPS of $0.79 for the upcoming quarter, which implies a minor -2.5% earnings miss.

I arrive at my fourth-quarter EPS estimate for Nike based on assumptions that the negative impact of COVID-19 lockdowns in Mainland China will be partially offset by other positive factors like sustained revenue growth in other markets like North America and no further deterioration in the supply chain situation.

What Is Nike’s Outlook?

Nike’s long-term growth outlook remains intact, notwithstanding short-term headwinds as outlined in the preceding sections of this article.

NKE noted at the company’s Q3 FY 2022 earnings briefing that “we continue to be optimistic and positive as it relates to our fiscal ’25 long-term algorithm.” As per its prior Q4 FY 2021 results call on June 24, 2021, Nike had previously guided for “high single-digit to low double-digit” top line expansion and “mid-to-high teens” bottom line growth for the long run. NKE also noted at the Q4 FY 2021 investor briefing that it expects its gross profit margin and EBIT margin to increase to the “high 40s” and “high teens” percentage levels, respectively by fiscal 2025.

The company’s long-term financial targets are in line with what the sell-side analysts are forecasting. According to financial projections sourced from S&P Capital IQ, Nike is expected to achieve revenue and normalized EPS CAGRs of +9.9% and +17.7%, respectively for the FY 2022-2025 period. Wall Street also sees NKE generating a 48.6% gross profit margin and a 17.9% EBIT margin in FY 2025.

The main driver of Nike’s faster growth and improved profitability in the long term is the company’s DTC or Direct-to-Consumer business, or what it refers to as NIKE Direct. NKE has set a target for NIKE Direct’s revenue contribution to increase from 40% in FY 2021 to 60% by FY 2025 as highlighted at its Q4 FY 2021 earnings briefing, and this should help the company to meet its long-term goals.

But Nike is less likely to deliver results similar to its long-term growth algorithm as early as FY 2023. When asked whether FY 2023 will “be sort of an on-algorithm type of year” at its Q3 FY 2022 investors’ call, NKE didn’t address the question directly, and it only noted that “the foundation is set for another year of strong growth” for fiscal 2023.

Is Nike Stock Fairly Valued Now?

Nike stock is at best fairly valued, or slightly overvalued, now in my opinion.

The market values NKE at a PEG ratio of approximately 1.5 times. This is based on Nike’s consensus forward next twelve months’ normalized P/E of 26.4 times now as per S&P Capital IQ data, and the company’s forward EPS CAGR of +17.7% for the FY 2022-2025 time period as mentioned in the previous section.

A general rule of thumb is that stocks are overvalued with a PEG multiple in excess of 1. But a 1.5 times PEG seems to be fair for a global market leader like NKE. Notably, Nike was named as the top apparel brand in “Kantar BrandZ Most Valuable Global Brands” for 2022.

Is NKE Stock A Buy, Sell, Or Hold?

NKE stock is a Hold. Putting short-term headwinds aside, Nike’s current valuations have factored in the company’s long-term growth expectations to a large degree.