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Nike's set to report Q3 results as concerns around product innovation loom

AInvestThursday, Mar 21, 2024 2:14 pm ET
2min read

NIKE (NKE) has been facing challenges in the sports and athletic wear market, leading to a decline in its stock price. The company is set to release its Q3 earnings, and there are concerns about its macroeconomic environment and product innovation. Despite these concerns, the low expectations for the earnings report could work in the stock's favor.

The stock has straddled the key $100-psyche level throughout the month of March. It has held support at the $96 area but faces significant resistance above with the 50-day ($102) and 200-day ($104) looming. An upside surprise could pressure shorts if we see these areas breached. 

During its Q2 earnings report, NIKE issued disappointing guidance for both Q3 and FY24. The company expects reported revenue to be slightly negative for Q3 and anticipates revenue growth of approximately 1 % for FY24, down from its previous outlook of mid-single-digit growth. This guidance caused the stock to plummet by about 12% the following day and continues to weigh on investor sentiment.

This lull in product innovation is reflected in NIKE's sales results. Revenue in North America fell by 4% last quarter, with wholesale revenues declining by 2%. Growth in Greater China also slowed, from 12% in Q1 to 8% in Q2. While demand remained solid during peak shopping periods, business was relatively weak outside of those periods. Despite these challenges, NIKE has made progress in resolving its inventory issues. Inventories decreased by 14% last quarter, allowing the company to implement its full price strategy and improve margins.

In Q2, gross margin increased by 170 bps to 44.6%, and NIKE expects further expansion in the second half of the year.

For the third quarter of fiscal 2024, analysts expect Nike to report a slight decline in sales and low constant currency growth. Gross margin is expected to expand, driven by supply chain cost benefits, while SG&A dollars are expected to increase, leading to deleverage. 

Nike is expected to reiterate its guidance for sales growth of around 1%, gross margin expansion, and SG&A dollar growth, including $400 million to $450 million in restructuring charges. Analysts anticipate that NIKE will provide a revenue and gross margin outlook during its upcoming earnings call. The consensus estimate for year-over-year revenue growth is 2.2%.

One of the key issues facing Nike is a perceived lull in product innovation. While the company has announced a multi-year product innovation cycle, it is currently dealing with supply chain inefficiencies and has implemented a $2 billion cost-saving plan to streamline its operations. This has led to a decrease in clearance products and an ability to implement full price strategies, which has boosted margins.

In the previous quarter, Nike reported a 4% decline in North American revenue and slowing growth in Greater China. However, the inventory issues that plagued the company in 2022 have subsided, allowing for increased gross margin expansion in the second half of the fiscal year. 

Nike's outlook on revenue and gross margin during the earnings call will be critical in understanding the company's near-term prospects. Market sentiment towards Nike has cooled since the company reduced its fiscal 2024 guidance in December.

Competitors like adidas, Hoka, and On have reported increased brand heat and share gains, while Nike has faced negative press regarding its product innovation and uniform quality. However, the company has recently launched a new Air Max Dn silhouette and increased shelf space for popular signature basketball products. 

Looking ahead,the sentiment on NIKE has cooled significantly due to the guidance reduction and negative press surrounding its product innovation and quality. However, there are positive indicators, such as the launch of new products like Air Max Dn, increased retail shelf space for signature basketball products, and plans for more innovation in the pipeline. Investors will be looking for signs that the brand remains healthy and that new products can offset slowing demand for key franchises. NIKE dominates basketball and is a leader in football/soccer but has lost share in everyday running . Greater detail on the brand's response to regain market share will be crucial.


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