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What to Expect from Nike’s Second Quarter Earnings?

Nike would release its fiscal second-quarter 2022 earnings today after the close of US markets. What are analysts expecting from the company and what’s the forecast for the stock?

Nike stock is up around 16% for the year and is underperforming the S&P 500. The stock had fallen after its fiscal first-quarter earnings after it lowered the full-year guidance amid supply chain disruptions as its plants in Vietnam were closed due to the COVID-19 pandemic. The company’s second-quarter earnings are coming at a time when the world is grappling with the omicron variant of the COVID-19 pandemic.

Nike’s second-quarter earnings estimates

Analysts polled by TIKR expect Nike to post revenues of $11.25 billion in the fiscal second quarter which is similar to what it had posted in the corresponding period last year. Meanwhile, its adjusted EPS is expected to fall 19.4% to $0.63 over the period. Notably, Nike is also battling with higher input and logistics costs.

What to watch in Nike’s earnings?

During Nike’s earnings release, markets would watch for updates on the supply chain situation and a possible revision to its annual guidance. Notably, there are concerns over the demand environment in China which is among the major markets for China. Also, the progression in its e-commerce sales, which accounted for a fifth of its total revenues in the previous quarter, would be in focus.

Nike expects online sales to gradually account for half of its total sales. “We have made significant progress to-date, increasing the digital mix of our business by more than 10 points in Q3 versus the prior year. NIKE’s ability to sustainably grow digital for the long term is rooted in our member connections and compelling experiences that only NIKE can offer,” said John Donahoe, the company’s CEO during the Q3 2021 earnings call.

US-China tensions

Companies like Nike are also impacted by souring US-China relations. Earlier this year, the company faced boycott calls in China over its previous comments about Xinjiang. Meanwhile, US-China ties have not improved under Joe Biden. If anything, they have worsened further under the Biden administration. The Biden administration has also been warming up to Taiwan and recently invited the country to the Democracy Summit, something that China criticized. The country sees Taiwan as a breakaway province and regularly protests US arms sales to the country.

Wall Street is bullish ahead of the earnings

Meanwhile, Wall Street analysts are bullish on the stock ahead of the earnings release. On Friday, Credit Suisse reiterated its overweight rating on the stock. It said, “in our view, after Nike’s big cut on the 1Q call, we think FY22 guidance is appropriate given ongoing global COVID risks, supply chain disruptions, and political issues in China. Our US retailer checks have been strong through holiday (despite some signs of inventory shortages) and we think inventory reallocated to DTC will drive upside to Street N. America revenue ests in F2Q.”

Credit Suisse is not the only brokerage that is bullish on the stock. Last week only, Truist initiated coverage of Nike with a buy rating. The firm is also bullish on Dick’s Sporting Goods amid the strong consumer demand.

Morgan Stanley sees Nike as a long-term opportunity

Morgan Stanley also reiterated its overweight rating on Nike stock and termed it an attractive long-term investment opportunity. “Production shortfalls & transit delays likely make for an in-line 2Q & reiterated FY guidance. We’re focused on production ramp-up status, inventory levels, tactics to offset supply chain headwinds, and China sales trends. We remain bullish given compelling L-T growth opportunity,” said Morgan Stanley in its note.

Nike stock forecast

Of the 31 analysts covering Nike stock, 24 have a buy rating while five have a hold rating. The remaining two analysts have a sell rating. The stock’s median target price is $184.50 which is a 14.3% premium over current prices.

Metaverse

Nike is also betting on metaverse and recently announced the acquisition of virtual shoe company RTFKT. “This acquisition is another step that accelerates Nike’s digital transformation and allows us to serve athletes and creators at the intersection of sport, creativity, gaming and culture,” said Donahoe. He added, “We’re acquiring a very talented team of creators with an authentic and connected brand. Our plan is to invest in the RTFKT brand, serve and grow their innovative and creative community and extend Nike’s digital footprint and capabilities.”

During the upcoming earnings release, the company might provide more updates on its metaverse plans which companies like Facebook and Nvidia see as a multi-billion dollar opportunity. Facebook even changed the company name to Meta Platforms to reflect the new business strategy.

Is Nike stock a good buy?

Nike is facing issues in the short term amid the global supply chain issues. Meanwhile, these issues should ease next year unless we see global shutdowns due to the omicron variant. For now, countries have been wary of announcing harsher measures to contain the spread of the new variant.

Looking at the valuations, Nike stock trades at an NTM (next-12 months) PE of 43.5x. The multiples are higher than its long-term averages. However, the higher multiples should be seen in context. Firstly, the broader market multiples have also expanded and secondly, Nike’s near-term earnings have been impacted due to multiple issues.

That said, it is an exciting long-term investment opportunity looking at its strong brand. However, in the short term, it might be volatile and react to the news flow over the omicron variant.

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Mohit Oberoi is a freelance finance writer based in India. he has completed his MBA with finance as majors and also holds a CFA charter. He has over 13 years of experience in financial markets. He has been writing extensively on global markets for the last six years and has written over 6,500 articles. He mainly covers metals, electric vehicles, asset managers, and other macroeconomic news. He also loves writing on personal finance and topics related to valuation.