Image: Valuentum
By Brian Nelson, CFA
On June 29, Nike (NKE) reported fourth-quarter fiscal 2023 results for the period ending May 31, 2023. During the quarter, revenue advanced 5% and 8% on a currency-neutral basis, but investors mostly focused on Nike’s bottom line, where diluted earnings per share fell 27%, to $0.66, missing the consensus estimate by a couple pennies. The firm expects material improvement in fiscal 2024, but we’re skeptical of just how much.
Nike continues to face increased product input costs as well as elevated freight and logistics expenses while consumers continue to take advantage of marked-down merchandise, pressuring margins. Though higher prices in some categories have helped mitigate Nike’s weak overall earnings performance, the firm’s gross margin still fell 140 basis points in the final quarter of its fiscal year.
Nike’s inventories nudged up modestly on a year-over-year basis, to ~$8.45 billion, and we think the firm will have to continue to pursue discounts, mainly in apparel, to get a better handle on its excess inventory issues. These days, we think the consumer is still more interested in putting food on the table than buying an extra pair of Nike’s.
That said, Nike expects a meaningful recovery in financial performance during fiscal 2024, as outlined on the company’s conference call:
…we expect fiscal 2024 reported revenue to grow mid-single-digits, led by NIKE Direct. This includes approximately four points of headwinds from the prior year from wholesale shipment timing and accelerated liquidation activities…
…In addition, based on current spot rates, we do not expect any material translation impact on revenue in fiscal 2024. We expect gross margins to expand a 140 basis points to a 160 basis points on a reported basis, which translates to approximately 200 basis points of operational gross margin expansion, excluding 50 basis points of negative impact from foreign exchange headwinds. This reflects the beginning of recovery from transitory headwinds, including more favorable ocean freight rates starting halfway through the second quarter and a modest improvement in markdowns versus the prior year.
In part due to its tremendous brand strength and deep consumer connections, Nike will find a way to work through its current earnings malaise, but we’re bigger fans of what we believe to be a generational opportunity in artificial intelligence [AI] and the big cap tech entities that primarily fill the stylistic area of large cap growth. Our fair value estimate for Nike is roughly in-line with where shares are currently trading, and we see no reason to add them to any newsletter portfolio at this time. A modest dividend yield of ~1.3% isn’t enough to turn many heads.
Tickerized for NKE, DKS, UA, UAA, FL, SKX, LULU, SHOO, DECK, BIRD, YETI, CROX, ADDYY, HIBB, ASO, PUMSY, WWW, SCVL, ZUMZ
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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, and RSP. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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