Nike is the next bellwether in focus after FedEx earnings whiff

If you thought FedEx laid a big fat egg with its earnings report last week, then brace yourself for Nike's fiscal first quarter earnings due out after the close of trading on Thursday.

There are a multitude of increasingly brutal headwinds facing major retailers, ranging from a global economic slowdown to bloated inventories bloated ahead of the crucial holiday season to ongoing supply chain inflation to demand weakness in China to the U.S. dollar being at fresh 20-year highs weighing on corporate profits.

These concerns have Wall Street analysts poised for a dose of gloom from mighty Dow component Nike later this week and a potential further sell-off in the stock (shares are already down 12% in the past month).

"We think there's going to be a really, really tough holiday," Barclays retail analyst Adrienne Yih said on Yahoo Finance Live. "And part of this is really about the forward 2023 purchasing behavior in the wholesale channel. Remember, Nike still has about 55% of its business in the wholesale channel even though they're making great strides in moving to direct-to-consumer. So that's sort of the crux in the near-to-medium term."

Longtime Morgan Stanley retail analyst Kimberly Greenberger added insight on Nike pre-earnings in a recent note:

  • Price Target: $129 (lowered from $149)

  • Rating: Overweight (reiterated)

  • Stock price movement assumed: +37%

The "whisper numbers" on Nike's first quarter earnings may not be low enough, Greenberger hints — meaning many investors may be surprised negatively by the company's report and guidance.

"Taken together, we anticipate [selling, general, and administrative] conservatism and a stronger China bounce back are enough to offset North America/Europe weakness and gross margin pressure, enabling Nike to deliver $0.90 in 1Q23 EPS, roughly in-line with consensus at $0.92. And while Street sales/gross margin forecasts may prove optimistic, our investor conversations indicate the market is similarly anticipating softer 1Q23 revenue and gross margin trends, but in-line EPS. So the stock is likely already priced for this outcome."

Investors should expect a guidance warning from Nike, Greenberger's analysis suggests.

"To us, all of this increases the likelihood that Nike cuts its fiscal year guidance, and we subsequently trim our FY 2023 EPS forecast to $3.35 from $3.46 prior, at the low end of Nike's prior implied EPS guidance range (~$3.35-3.65). However, we caution that even our 10%-below-consensus EPS forecast does not contemplate a recession, and thus we see risk for further downside should a recession materialize in North America/Europe. Put simply, we see room Nike guides to an EPS outcome even below our revised $3.35 forecast. As it relates to positioning, investor guidance expectations appear mixed – some are braced for a cut (to ~$3.30 level, a touch below us), while others think Nike could reiterate prior guidance. This could lead to divergent stock reaction outcomes."

SEATTLE, WASHINGTON - SEPTEMBER 14: Jesse Winker #27 of the Seattle Mariners adjusts his bat while wearing Nike gloves during the fifth inning against the San Diego Padres at T-Mobile Park on September 14, 2022 in Seattle, Washington. (Photo by Steph Chambers/Getty Images)
Jesse Winker #27 of the Seattle Mariners adjusts his bat while wearing Nike gloves during the fifth inning against the San Diego Padres at T-Mobile Park on September 14, 2022 in Seattle, Washington. (Photo by Steph Chambers/Getty Images)

Nike's troubles could continue into next year.

"Based on the worsening macro backdrop/outlook, retail second quarter earnings results/mostly lowered fiscal year guides, our recent sportswear channel checks, as well as intra-quarter conversations with some of Nike's wholesale peers, we fear potential 1Q23 demand softness & higher promotional/discounting activity continues through at least calendar year end, and potentially into next year (depending on the inventory clean-up trajectory)."

Greenberger still likes Nike stock longer-term.

"Nike is in the early innings of transition from a wholesaler to a direct-to-consumer brand. Success would make it one of few to benefit from the shift to eCommerce (~20% of ‘21 sales). Its direct-to-consumer business (~37% of 2021 sales) is igniting its next phase of margin-accretive revenue growth, driving a high-teens five-year EPS compound annual growth rate. Nike also stands to benefit from advancing global consumer activewear demand (due to the work-from-home induced preference for comfort oriented apparel/footwear and increased focus on health and wellness)

▪ Nike's strategic portfolio decisions, tech investments, and supply chain innovation also create long-term competitive advantages, and are further supported by an industry-leading balance sheet."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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