The Nike district impresses: here’s how to play it

Sports footwear, apparel and equipment giant Nike (NKE) released the company’s third fiscal quarter results on Monday evening. These results were generally better than expected. The stock reacted accordingly. Let’s dig.

For the three-month period ending Feb. 28, Nike posted GAAP EPS of $0.87 on revenue of $10.87 billion. These numbers top the consensus view for both revenue and net income, while amounting to -3.3% earnings growth on 4.9% revenue growth. As I said, the worst was expected or feared due to issues in supply chains and Covid lockdowns in regions where Nike manufactures goods in Asia.

Nike Direct sales increased 15% (+17% currency neutral) to $4.6 billion, Nike-branded digital sales increased 19% (+22% currency neutral), driven by a 33% growth in North America. Gross margin increased by 100 basis points to 46.6% vs. 46.5% expected. Nike brand revenue increased 8% on a currency-neutral basis, driven by 13% growth in EMEA (Europe, Middle East and Africa), while Converse revenue increased 2% (-1% reported) on a currency neutral basis as gains in North America were offset by declines in Asia.

Through the brand

Regarding what was sold in Nike branded products.

Footwear: Sales increased 2% to $6.66 billion.

Apparel: Sales increased 9% to $3.232 billion.

Equipment: sales increased by 32% to $390 million.

By region

Regarding where the sales are made.

North America: Sales increased 9% to $3.882 billion.

Europe, Middle East and Africa: Sales increased 7% to $2.779 billion

Greater China: Sales contracted 5% to $2.16 billion.

Asia-Pacific and Latin America: Sales increased 11% to $1.461 billion.

Returns to shareholders

Many people may not realize that with a dividend yield of just 0.94%, Nike has actually increased its dividend payouts for 20 consecutive years. For the reported quarter, Nike returned approximately $1.7 billion to shareholders. Dividend payouts totaled $484 million, up 12% year-over-year. Additionally, the company repurchased $1.2 billion worth of common stock in the three months, reflecting the withdrawal of 8.1 million shares. It’s still part of Nike’s four-year, $15 billion buyout program that was cleared in June 2018.

Balance sheet

Nike ended the quarter with net cash of $13.467 billion and inventory of $7.7 billion, leading to current assets of $26.962 billion. It was 9% more than a year ago. Current liabilities were $8.818 billion, down 1% from the prior year. This left Nike with a very healthy current ratio of 3.06. Total assets of $38.577 billion easily outweigh total liabilities less equity of $23.768 billion, which included $9.418 billion in long-term debt. This review reviews the Sarge test.

Wall Street

I can only find five sell-side analysts who are both rated five stars by TipRanks and have given their opinion on Nike since these results were released. There are quite a few analysts rated below five stars who have opined to include a few well-known names, but I’ll stick to the top rated ones for the purposes of this article. Of the five, four analysts have either a “buy” or “equivalent buy” rating on NKE. The average target price of the four is $164.40 with a high of $185 (Randal Konik of Jefferies) and a low of $150 (Simeon Siegel of BMO Capital). Curiously, Siegel is part of the “purchases”. Citigroup’s Paul Lejuez, which is the “neutral” among these five, has a target price of $157.

My minds

I am impressed with the quarter’s performance. I admit it. The company said on the call that the impact of the lockdowns in China was unclear. I would add that the war in Europe adds additional uncertainty. The company is telling auditors bluntly that they are three months away from providing specific financial guidance for fiscal year 2023. I guess they need to see if China will bounce back the way they hope. If Nike isn’t sure, neither am I.

Clearly, Nike technically suffered from this double top reversal pattern which produced a downward pivot from $144. Stocks have absorbed this and are in the midst of a now significant rally. My three indicators (Relative Strength, Full Stochastics Oscillator, Daily MACD) are now approaching an overbought technical condition.

Additionally, stocks are also approaching their 50-day SMA ($139) this morning with an eye on the unfilled gap between $154 and $161 in early January, but also leaving a gap in the wake of today. I see nothing wrong with buying a few shares of NKE given that the company expects to be ready to offer specific advice in three months. I believe, however, that a better entry point could be obtained in the meantime. I’d rather wait near Monday’s high of $128 to buy on momentum as the stock takes that 50-day SMA than throw money at equity between $130 and $130.

Those interested might think of writing the $130 NKE put options from June 17 for around $5.10. If the stock takes off, it’s still a 5-spot in your pocket. If you end up being tagged in June, it will be with a net base below $125.

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