Overheard On Wall Street: Analysts React To Nike’s Q1 Slam Dunk

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Nike Kobe X Bright Crimson.
Rock City Kicks.

The praise for Nike Inc. keeps rolling in.

Analysts are impressed, to say the least, by the firm’s ability to pull off robust sales and profit growth despite macroeconomic pressures in its first quarter.

Among Nike’s most notable Q1 highlights are its accelerated futures orders and 30 percent revenue growth in an economically volatile China, analysts say.

In a Sept. 25 note, Cannacord Genuity Inc. analyst Camilo Lyon wrote that the firm’s global futures growth of 17 percent “punctuated” an already “solid Q1.”

Meanwhile, motivated by Nike’s futures growth and apparent “immunity to China’s economic woes,” previously sidelined Sterne Agee CRT analyst Sam Poser upgraded Nike from neutral to buy and upped his price target by nearly $40, to $150.

“Nike executes its mission of bringing ‘inspiration and innovation to every athlete in the world’ by being the industry leader in global grassroots engagement with its customers,” Poser wrote in a Sept. 25 note. “The grassroots efforts are the secret sauce for this company, which will do $33 billion in revenue in FY16.”

Citi Research analyst Kate McShane, who also upped her price target for the stock, from $126 to $142, said she expects “solid futures growth in all regions; potential upside to guidance on pricing power, supply-chain efficiencies and share buybacks; and better-than- anticipated SG&A leverage” to continue to drive the firm’s stock upward.

McShane also noted that Nike’s performance is a solid indicator of strength at other athletic and sporting-goods companies.

“We view Nike’s strong results as a positive read for Foot Locker, Under Armour and Dick’s Sporting Goods,” McShane wrote on Sept. 24. “Foot Locker and Dick’s should continue to benefit from an innovative Nike pipeline going into the Olympics, which bodes well for both unit demand and higher [average selling prices].”

Despite the positive feedback for Nike, analysts had one main area of concern: the North American markets, which grew by 9 percent — a deceleration from the previous quarter — and also had excess inventory.

“North America [was] solid, but inventory needs work,” wrote Susquehanna Financial LLLP analyst Christopher Svezia on Sept. 25. “While it’s not something we would read into, we were slightly disappointed by North America’s [low-single-digit] comp [growth] and the fact that inventory was slightly elevated. The latter is due to port-congestion issues earlier in the year, in addition to a recently expanded distribution center running below capacity.”

Gross margins for the region are expected be pressured for the next two quarters, Svezia said. He noted, however, that product innovations and improved in-store presentations will continue to benefit the sector.

Other Q1 highlights, analysts said, were Nike’s plans to keep ramping up product innovation, which should continue to build the brand’s value propositions in the future.

Not to mention, Poser noted, that “improved product offerings usually warrant higher prices.”

By product category, Lyon pointed out that sportswear, basketball and running were the major drivers in Nike’s Q1, as well as double-digit growth in women’s.

“Total [direct-to-consumer] growth was also impressive (21 percent) with e-commerce [up] 46 percent and store comps [up] 7 percent — a trend we expect to continue,” Lyon wrote.

Brand Jordan, analysts said, also remains a standout for Nike.

“The Jordan brand is being accepted on a global basis, and likely drives annual revenue of $4 billion,” Poser said, adding that the label likely drives total U.S. sales in basketball. “Management plans to expand Brand Jordan offerings from basketball to training and other categories, which should globally increase the reach and revenue of the brand.”