Nike sales may increase as discounts draw customers; Margin clamp looms

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

Analysts forecast a nearly 11 percent jump in quarterly sales, as a pick-up in the U.S. business could help overcome weakness in the Chinese market.

“While retailers were initially concerned 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 Friday.

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

THE CONNECTION

Brokerage Telsey Advisory Group said last week that better-than-expected sales from retailers such as Foot Locker Inc and Dick’s Sporting Goods Inc point to Nike’s success in attracting inflation-weary customers with discounts.

While those discounts have helped clear unsold shares at Nike, which had $9.7 billion in inventory at the end of the last quarter, they may have come at a cost, as analysts estimate a lower margin target.

Shutdowns in China in October and November are also expected to be a drag on sales in the region for the second quarter. The company reported a 20 percent decline in Greater China revenue in the same period last year and a 16 percent drop in the previous quarter ended Aug. 31.

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

BASIC

** An average of 26 analysts forecast Nike’s second-quarter revenue to grow about 11 percent to $12.57 billion, with sales in China expected to fall 6 percent and those in North America expected to jump nearly 21 percent

** Earnings per share in the 2nd quarter are expected to come in at 65 cents

WALL STREET SENTIMENT

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

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

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

Learn more:

For Nike, is the worst over?

The activewear giant has struggled this year with inventory problems and a slowdown in China. The results this week may show that has turned. That, plus whatever else to watch for in the coming days.

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