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Is Nike Getting $9.7 Billion Worth of Inventory Off its Hands?

As Nike’s second quarter earnings come into view, one brokerage firm is bullish on the sneaker giant’s prospects despite the headwinds the company has battled across inventory, the supply chain and slowed sales in China.

Telsey Advisory Group believes the setup for the second half of fiscal year 2023 into 2024 bodes well for Nike, saying the company should enter the next calendar year in a clean inventory position. Telsey’s research report also cited strong brand momentum, a margin-accretive shift to direct-to-consumer (DTC) sales, easing of Covid restrictions in China and abating headwinds related to foreign exchange rates.

“Nike set profit expectations low for 2QF23 and promoted early to clear excess Spring/Fall inventory that arrived late,” Telsey’s report said. “The combination of better-than-expected sales from retailers like Foot Locker and Dick’s during 3Q22 and our store observations point to success by Nike in attracting consumers with promotions. As such, we expect the company to have made good progress in lowering inventory levels.”

Nike had $9.7 billion in inventory at the end of its first quarter, up 44 percent compared to the prior year period’s $6.7 billion. In North America, inventory rose 65 percent year-over-year bump—leading the company to mark down more product to get results.

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As for China, Telsey says it is looking for sequential improvement over the first quarter, when China sales declined 16 percent, citing easier year-over-year comparisons as more stores reopen. The group expects second quarter sales in China to decline 7 percent.

The firm maintained an “Outperform” rating for the Swoosh, raising its 12-month price target to $130 from $110. The rating spike comes as Telsey expects full-year 2024 earnings per share to now reach $3.70, up from its prior expectations of $3.55.

Nike’s stock price closed at $103.05 per share on Monday.

In its first-quarter earnings report in September, Nike saw 4 percent revenue growth to $12.7 billion (10 percent growth on a constant-currency basis), compared with $12.2 billion a year earlier. But net income plummeted 22 percent based on the various headwinds to $1.5 billion, or 93 cents per share, compared with $1.87 billion, or $1.18 per share, a year earlier.

For the second quarter, Nike expects reported revenue to grow low-double-digits on strong consumer demand, despite 900 basis points (9 percentage points) of foreign exchange headwinds. In September, month-to-date retail sales were up double-digits versus the prior year, following a strong back-to-school season.

Telsey expects total sales in the quarter to jump 13.4 percent to $12.7 billion, which is in line with Nike’s low-double-digit expectations and slightly beats the average consensus FactSet estimates of $12.6 billion.

Anticipated second-quarter earnings per share was tagged at 68 cents, up from the FactSet consensus of 65 cents.

The former Kyrie Irving partner said in September it expects second-quarter gross margin to decline approximately 350 to 400 basis points (3.5 percentage points to 4 percentage points) versus the prior year. Telsey Advisory Group projects gross margin will contract 380 basis points (3.8 percentage points) to 42.1 percent, in line with estimates from FactSet.

Telsey raised its earnings estimates for Nike for the remaining quarters of fiscal year 2023, and all of 2024.

“We are raising our estimates to reflect less FX pressure and continued momentum for the brand,” Telsey wrote in the report, using the acronym for foreign exchange. “Our FY23 EPS estimate goes to $2.85 from $2.75 (compared to FactSet’s $2.97) with sales growth of 5.6 percent to $49.2 billion vs. $48.5 billion previously (compared with FactSet’s $49 billion) including constant-currency sales of 11.5 percent vs. 11.2 percent previously.

The firm’s updated 2024 earnings estimates at $3.70 per share account for sales growth of 9 percent to $53.6 billion ahead of the previous estimate of $53.5 billion. Operating margin is expected to expand roughly 180 basis points to 12.6 percent vs. 12.4 percent previously forecast.