NIKE, Inc. (NKE) is scheduled to report its second-quarter (ended November 30, 2023) results on December 21, 2023. In this piece, I have discussed why it could be prudent to wait for a better entry point in the stock.

NKE’s EPS for the second quarter is expected to remain flat year-over-year to $0.85. Its revenue for the same quarter is expected to increase 0.8% year-over-year to $13.43 billion. In the last quarter, the company beat the consensus EPS estimate by 24.1%, but its revenue came short of the analyst estimates by 0.5%.

Its inventories during the first quarter fell 10% year-over-year to $8.70 billion. NKE’s Executive VP and CFO said, “Our first-quarter results demonstrated the impact of staying on the offense over the past fiscal year. With a healthy marketplace and another quarter of brand and business momentum, we are strengthening our foundation for sustainable, profitable, long-term growth.”

NKE’s second-quarter earnings will give investors a peek into how the company started the holiday season and also its outlook for how it will pan out for the company. Its Direct-to-Consumer (DTC) business is expected to have done well during the second quarter.  Moreover, its Digital sales are expected to be robust, with growth in traffic and a rise in buying frequency.

During the first quarter earnings call, the company forecasted its full-year reported revenue to grow in mid-single digits. It expected second-quarter revenue growth to rise slightly over the prior year as it faced difficulties compared to fiscal 2023. The company expects its second-quarter gross margins to expand approximately 100 basis points compared to the prior-year quarter.

Meanwhile, the company expects a negative impact of 50 basis points due to foreign exchange headwinds. Also, its SG&A is expected to grow to mid-to-high single digits.

The stock has gained 29.6% over the past three months and 19% over the past year to close the last trading session at $122.64.

Here’s what could influence NKE’s performance in the upcoming months:

Mixed Financials

NKE’s revenues for the fiscal first quarter ended August 31, 2023, increased 2% year-over-year to $12.94 billion. Its gross profit rose 1.9% over the prior-year quarter to $5.72 billion. Additionally, its EPS came in at $0.94, representing an increase of 1.1% year-over-year.

On the other hand, its net income declined 1.2% year-over-year to $1.45 billion. Also, its EBIT decreased 12.3% year-over-year to $1.61 billion.

Favorable Analyst Estimates

Analysts expect NKE’s EPS for fiscal 2024 and 2025 to increase 15.3% and 16.9% year-over-year to $3.72 and $4.35, respectively. Its fiscal 2024 and 2025 revenue is expected to increase 3.8% and 7.7% year-over-year to $53.15 billion and $57.22 billion, respectively.

Stretched Valuation

In terms of forward non-GAAP P/E, NKE’s 32.94x is 105.1 % higher than the 16.06x industry average. Likewise, its 3.58x forward EV/Sales is 184.2 % higher than the 1.26x industry average. Additionally, its 25.35x forward EV/EBITDA is 148.5% higher than the 10.20x industry average.

High Profitability

In terms of the trailing-12-month net income margin, NKE’s 9.82% is 117.1% higher than the 4.52% industry average. Likewise, its 7.28% trailing-12-month levered FCF margin is 44.7% higher than the industry average of 5.04%. Furthermore, the stock’s 1.32x trailing-12-month asset turnover ratio is 33% higher than the industry average of 0.99x.

POWR Ratings Reflect Uncertainty

NKE has an overall rating of C, equating to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. NKE has a D grade for Value, consistent with its stretched valuation.

It has a B grade for Quality, in sync with its high profitability. Its 1.08 five-year beta justifies its C grade for Stability.

NKE is ranked #13 out of 36 stocks in the Athletics & Recreation industry. Click here to access NKE’s Growth, Momentum, and Sentiment ratings.

Bottom Line

NKE’s growth in fiscal 2024 is expected to be driven by NIKE Direct. The company has been benefiting from its Consumer Direct Acceleration strategy along with its strong portfolio of products, robust consumer demand, and strong performance in its digital and DTC businesses. Moreover, the company has been gaining from higher retail sales growth over the growth in inventory in the past few quarters.

However, its gross margins are expected to take a hit due to foreign exchange headwinds and higher product input costs. Additionally, higher SG&A expenses due to increased demand creation investments are expected to impact its operating profitability.

Therefore, given its mixed fundamentals and stability, it could be wise to wait for a better entry point in the stock.

How Does NIKE, Inc. (NKE) Stack Up Against Its Peers?

NKE has an overall POWR Rating of C, equating to a Neutral rating. You may check out the stocks within the Athletics & Recreation industry possessing an A (Strong Buy) or B (Buy) rating: Gaia, Inc. (GAIA), American Outdoor Brands, Inc. (AOUT), and Skechers U.S.A., Inc. (SKX). To access more Athletics & Recreation stocks set to outperform, click here.                                                                                                                   

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NKE shares were trading at $122.52 per share on Wednesday morning, down $0.12 (-0.10%). Year-to-date, NKE has gained 6.06%, versus a 26.21% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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