Nike Sales May Soar as Discounts Draw Shoppers; Margin Squeeze Looms

Nike Inc is expected to report a big bump in second-quarter sales, as it offered deep discounts on its shoes and sportswear to keep the interest of recession-wary shoppers in its brand and clear excess inventory.

Analysts are projecting a near 11 percent jump in quarterly sales as a bounce in its US business may help overcome weakness in the China market.

“While retailers were initially worried about the amount of Nike inventory being shipped, the consumer is showing up and buying the Nike brand,” Credit Suisse analyst Michael Binetti wrote in a note on Friday.

“Most retailers have been worryingly low on Nike inventory for 2 years and are just happy to have enough to drive their apparel & footwear categories at this point,” Binetti said.

THE CONTEXT

Brokerage Telsey Advisory Group last week said better-than-expected sales from retailers like Foot Locker Inc and Dick’s Sporting Goods Inc were pointing to Nike’s success in attracting inflation-weary shoppers with discounts.

While those discounts have helped clear unsold stocks at Nike, which was sitting on $9.7 billion of inventory at the end of the last quarter, they may have come at a cost, as analysts are projecting a downbeat margin target.

Lockdowns in China in October and November are also expected to be a drag on its sales in the region for the second quarter. The company reported a 20 percent slump in Greater China revenue in the same period last year and a 16% fall in the prior quarter ended Aug. 31.

However, leaner inventory, the reopening of China and strong demand from sneakerheads are expected to set the company up for a better second-half of the year.

THE FUNDAMENTALS

** On average, 26 analysts forecast Nike’s Q2 revenue to grow about 11 percent to $12.57 billion, with sales in China expected to drop 6 percent and those in North America expected to jump almost 21 percent

** Q2 profit per share is expected to come in at 65 cents

WALL STREET SENTIMENT

** Shares of Nike have declined more than 36 percent this year. In comparison, the Dow Jones Industrial Average index has dropped about 9 percent, while the S&P 500 is down 19 percent

** Nike stock has a consensus rating of “buy” among 38 brokerages, with 25 rating it “buy” or higher, 11 saying “hold” and two “sell” or lower

** At least eight brokerages have lifted their price targets since the start of December and currently has a median price target of $120, up from $110 in November

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