Elevator Pitch
I charge per unit Nike, Inc.’due south (NYSE:NKE) shares equally a Hold or Neutral.
The marketplace is worried that the Chinese consumer boycott, a potential slowdown or normalization of digital acquirement growth, and the closure of production plants in Vietnam due to a
resurgence of COVID-xix could have a negative affect on NKE’southward fiscal functioning in the near term. These are the key factors which have led to Nike’s shares underperforming the key benchmark indices this year.
Among these iii key factors, I see the manufacturing and supply chain issues in Vietnam having the greatest negative impact on Nike’s upcoming Q1 FY 2022 earnings. As well, NKE’south forwards FY 2022 P/E valuation appears to be expensive both on an accented basis and compared to its historical trading averages. I view a Concur rating as nigh appropriate for Nike prior to the company’southward upcoming earnings, which have downside risks relating to production and supply.
Company Description
Started in 1964 and listed on the stock market since 1980, Nike, Inc calls itself “a worldwide leader in the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment” in the company’s FY 2021 (YE May 31) 10-K filing.
The footwear, dress and equipment product lines accounted for 66%, 31% and 3% of NKE’southward financial 2021 revenue, respectively. With regards to geographic sales mix, Nike derived 41%, 27%, xix% and 13% of its FY 2021 top line from Due north America, EMEA (Europe, Middle East & Africa), Greater Mainland china and APLA (Asia Pacific & Latin America), respectively.
Nike’due south Concrete Retail Footprint As Of May 31, 2021
Source: Nike’s FY 2021 x-K
Nike Stock Toll
Year-to-date, Nike’s shares have underperformed the three major stock indices. Nike’s stock price rose by a decent +12.8% in the first nine and a half months of 2021. In comparison, the Southward&P 500, Nasdaq, & the Dow were up by +19.0%, +17.two% and +13.9%, respectively in 2021 thus far.
It has been a different story in the by three months as NKE has outperformed the major stock indices by a wide margin recently. Nike’s share price jumped by +xx.9% in the last 3 months, while the Dow, the S&P 500 and Nasdaq increased by +1.1%, +5.2% and +seven.iv%, respectively over the aforementioned period. Nike’south recent outperformance is largely attributable to the visitor’s strong Q4 FY 2021 earnings, which I go into particular in the subsequent section.
In the current section of this article, I focus on the reasons behind Nike’southward relative underperformance year-to-engagement as compared to the key benchmark indices.
Firstly, there were concerns about Nike’due south sales growth in China earlier in the year.
CNN
reported on March 25, 2021 that NKE was one of the companies “facing a boycott in Prc because of the stand up they’ve taken against the declared apply of forced labor to produce cotton in the state’s western region of Xinjiang.” A subsequent May half dozen, 2021
Bloomberg
article quoted inquiry from Morningstar (MORN) to highlight that Nike’southward online sales on key Chinese e-commerce site
Tmall
fell by -59% YoY in April 2021, which was very likely the effect of the cold-shoulder. Greater Cathay is a key market for Nike contributing shut to a 5th of its FY 2021 sales.
Notably, Nike’s Q4 FY 2021 Greater China sales of $one,933 meg came in roughly -8% below marketplace expectations, as the boycott had a negative impact on the company’s revenue in the Chinese marketplace. On the positive side of things, NKE revealed at its Q4 FY 2021 earnings call on June 24, 2021 that it has already witnessed “a recovery tendency” for its Greater China business with “month to date (June 2021) retail sales trends approaching prior-year levels.” This suggests that the effects of the boycott could take waned, and Nike’s Greater Red china sales are likely to normalize going forrad. However, the market will need to see a recovery in Nike’s Q1 FY 2022 Greater China sales, before investors are convinced that the boycott in Communist china is no longer a major issue.
Secondly, investors were worried that Nike’due south e-commerce sales growth will tiresome significantly following the reopening of the economic system in the US and other parts of the world.
It is noteworthy that Nike disclosed at its recent quarterly results briefing that “even as physical retail reopened, we continued to come across potent growth in Nike Digital of 37 per centum” YoY in Q4 FY 2021. Looking ahead, NKE has set a target to increase the contribution of digital sales (as a proportion of sales for both owned and partnered businesses) from shut to 35% in fiscal 2021 to 50% in FY 2025.
It appears that the tailwinds for NKE’s e-commerce/digital business are structural in nature, rather than merely boosted by Work-From-Home tailwinds relating to COVID-19. Nonetheless, Nike yet has to continue delivering robust digital sales growth to prove to the market place that the positive growth outlook for its eastward-commerce business organization volition remain unchanged even in a mail service-pandemic surroundings.
Thirdly, supply chain issues represent a significant downside take a chance for Nike’s nearly-term revenue and earnings.
According to a September 13, 2021
Seeking Alpha
news article, a sell-side analyst from BTIG highlighted that NKE faces “astringent supply chain disruptions resulting from the COVID driven mill shutdowns in Vietnam.” NKE sourced more than one-half of the company’south Nike branded footwear from production facilities in Vietnam in the almost recent fiscal yr. Vietnam’s local media,
VN Limited International
also reported on September 13, 2021 that “nearly 35 percent of textile and garment factories in the country are shut downwards.”
It is a business organisation that the COVID-19 vaccination rate in Vietnam remains low (5.2% fully vaccinated), while the state has been faced with a sharp spike in coronavirus cases in the past two and a half months as per the chart beneath.
Daily Confirmed Cases Of COVID-19 In Vietnam
Source: Worldometer
In the next section, I provide a review of Nike’s contempo Q4 FY 2021 earnings, and discuss expectations for NKE’south upcoming Q1 FY 2022 earnings.
NKE Stock Earnings
NKE announced the company’s Q4 FY 2021 and full-yr financial 2021 financial results earlier on June 24, 2021. This provides the footing for a discussion and preview of its upcoming Q1 FY 2022 earnings to be released adjacent week on September 23, 2021.
Nike’s revenue surged by +96% YoY from $half-dozen,313 million in Q4 FY 2020 to $12,344 million in Q4 FY 2021, which beat out the sell-side’southward consensus sales forecast of $eleven.0 billion by +12%. NKE also reversed from a net loss per share of -$0.51 in the fourth quarter of financial 2020 to deliver a positive earnings per share of $0.93 in the almost recent quarter. Furthermore, Nike’s Q4 FY 2021 earnings per share was +82% higher as compared to the marketplace consensus’ earnings estimate of $0.51. This adept fix of results explains Nike’s share price outperformance relative to the major stock indices in the past three months. The sell-side consensus financial estimates were obtained from S&P Capital IQ.
More importantly, NKE’south full-year FY 2021 acquirement and net profit exceeded their respective pre-pandemic (FY 2019) levels past +xiv% and +42%, respectively. This implies that Nike’s excellent financial functioning for Q4 2021 and FY 2021 was driven by both cyclical recovery and structural growth.
The central structural growth commuter for Nike is its DTC or Direct-to-Consumer sales. At its 2017 Investor Twenty-four hours, Nike emphasized that “Nike.com and NIKE stores will be the fastest-growing part of our business” going forward with its DTC strategy.
Key Elements Of Nike’s DTC Strategy Outlined In 2017 With Regards To Innovation, Speed, And Consumer Connections
Source: Nike’s June 15, 2017 Media Release
The results speak for themselves. Nike’s DTC sales increased by +32% YoY (as compared to the company’s overall superlative line growth of +nineteen%) to $16.4 billion in FY 2021. In the past 4 years since 2017, the company’s revenue from DTC has grown by +80% on a cumulative footing. It is clear that Nike’s increased focus on DTC sales has been a cracking success.
Notably, Nike has raised the company’s FY 2022-FY 2025 revenue CAGR guidance from “high single-digit growth” to “high single-digit to depression double-digit growth” in June 2021. It is very likely that the better-than-expected DTC sales in the recent fiscal year has given the company greater confidence to projection a stronger revenue growth outlook.
Equally highlighted at the beginning of this section, Nike will report its fiscal results for the first quarter of financial 2022 on September 23, 2021, which is expected to accept a major impact on the company’s short-term stock price performance.
Based on marketplace consensus information sourced from S&P Capital IQ, NKE’due south top line and lesser line growth in Q1 FY 2022 should exist much slower as compared to Q4 FY 2021. Wall Street analysts forecast that Nike’s top line will expand by +18% YoY in Q1 FY 2022, which will be significantly lower than the company’south +96% YoY sales growth in the final quarter of the prior fiscal yr. On a QoQ basis, Nike’south Q1 FY 2022 consensus quarterly revenue translates to a acquirement increment of just +1%. Similarly, Nike’s YoY normalized earnings per share growth is expected to irksome from +282% in Q4 FY 2021 to +xviii% in the upcoming quarter.
In my stance, the sell-side analysts’ financial forecasts for Q1 FY 2022 are quite reasonable.
Apart from a lower base in Q4 FY 2020 (March 1, 2020 to May 31, 2020 when the pandemic was at its worst) as compared to Q1 FY 2021, Nike’due south expected weaker YoY growth for Q1 FY 2022 is also likely owing to concerns about production disruptions due to the closure of manufacturing facilities in the visitor’south key production base of Vietnam, as noted before. At the company’southward Q4 FY 2021 earnings call, Nike already guided for “supply chain delays and higher logistics costs to persist throughout much of financial ’22”, and the recent COVID-nineteen resurgence and the associated lock-downs in Vietnam could make things worse for the visitor. In contrast, I encounter Nike’due south Communist china sales recovering and its growth momentum for DTC sales being maintained in the first quarter of the new fiscal year. In other words, it is likely to be a mixed quarter for NKE in Q1 FY 2022.
Is NKE Stock A Buy, Sell, Or Hold?
NKE stock is a Concur from my perspective.
Nike’s current valuations are non that attractive. NKE’s consensus forrad FY 2022 normalized P/E multiple of 37.2 times based on its traded stock toll of $159.52 as of September 13, 2021 represents a significant premium over the stock’s five-twelvemonth and 10-year boilerplate consensus forward next twelve months’ P/Eastward multiples of 30.6 respectively and 26.7 times, respectively.
Although growing revenue contribution from the DTC channel is expected to drive the positive re-rating of Nike’s valuations in the medium to long term, Nike currently faces brusk-term headwinds in relation to supply chain problems, specially Vietnam. Because these different factors, a Neutral rating for Nike is warranted.
Nike’s key risks are lower-than-expected sales in the near term as a result of production disruptions in Vietnam, and slower-than-expected DTC revenue growth going forward due to execution bug.
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Source: https://seekingalpha.com/article/4455208-nike-stock-buy-sell-before-earnings