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Nike (NKE) set to report Q3 2022 results: here’s what to expect

By on March 21, 2022 0

Shoes line the shelves at the Nike store on December 21, 2021 in Miami Beach, Florida.

Joe Raedle | Getty Images

Nike’s post-earnings comments on Monday could be a harbinger of how the retail sector is being affected by the war in Ukraine, sky-high oil prices and inflationary pressures that threaten to cut spending on consumption.

The sneaker giant is expected to report fiscal third quarter results after the market closes. Nike’s exposure to China is also under the microscope, as the United States could choose to impose consequences if Beijing helps Russia wage its war against Ukraine and Western brands face continued boycotts in all of Asia.

Shares of Nike have been trading in recent weeks as investors expect the retailer to be hit by some of the aforementioned risks. The stock closed Friday at $131.24, down 21% year-to-date, from the S&P 500’s 6% decline, and a 52-week high of $179.10. Still, some analysts say stocks can drop further.

Nike is expected to post revenue of $10.6 billion for the third quarter of fiscal 2022, on earnings of 71 cents per share, according to an analyst survey by Refinitiv.

Here are some of the key topics analysts are watching and expecting Nike to address later on Monday.

Prospects poised to disappoint

UBS analyst Jay Sole thinks Nike’s outlook for the fourth quarter and initial fiscal year 2023, if the retailer offers it, will disappoint investors.

“Our audits suggest that Nike’s business in China is not recovering as quickly as we, or the market, expected,” Sole wrote in a note to clients. Additionally, he said, the market has underestimated the effects of ongoing global supply chain challenges that have delayed manufacturing and shipments, Nike a temporary suspension of operations in Russia, higher oil prices and a rising US dollar that will put pressure on Nike’s earnings forecast.

Earlier this month, Nike said that given the rapidly changing situation in Russia, as well as increased operational challenges, it had suspended operations there. At this point, it’s unclear how long this will persist. The company has 116 retail stores in Russia, accounting for less than 2% of its total sales, according to analysts’ estimates.

“We believe Nike’s third quarter report will lead the market to see the company’s earnings rebound occur later than currently believed,” Sole said.

Analysts polled by Refinitiv see total Nike sales rising 2.3% in the fourth quarter from a year earlier. For fiscal 2023, Wall Street forecasts Nike sales to be $53 billion, up 13% from a year earlier.

China risk

Barclays analyst Adrienne Yih said the biggest and longer-term hurdle for Nike would be China, which accounted for 19% of Nike’s sales in the 2021 financial year, which ended. May 31.

In early 2021, sales of brands such as Nike and rival Adidas plunged in China due to a boycott by Chinese citizens of Western brands. The outrage was sparked by allegations of forced labor in the cotton industry around the Xinjiang region, where Uyghur Muslims make up a significant minority group. These allegations have been denied by the Chinese government, but brands such as Nike have decided not to use cotton from Xinjiang.

When Nike released its second-quarter results in late December, chief financial officer Matt Friend told analysts on a conference call that Nike was seeing “encouraging signs” in China. Still, the company expects fiscal 2022 to be a year of recovery in the region, he said. Later on the call, chief executive John Donahoe said Nike was taking a long-term view in China and creating new products tailored to the Chinese consumer.

Nike may not see a positive catalyst until June or later, said Morgan Stanley analyst Kimberly Greenberger.

She pointed to the recent renewed Covid lockdowns in China as another risk for Nike and its peers.

“[China] has been a focal point for investors over the past year amid boycotts and inventory issues, with investors specifically questioning whether the underperformance is demand or supply driven,” Greenberger wrote, in a note to customers. “Third quarter results are unlikely to resolve these lingering issues. debates.”

Separately, Citi retail analyst Paul Lejuez said his team surveyed 1,000 Chinese consumers earlier this month to gauge how they feel about Nike compared to other brands. brands, including those based in China. The survey found that Chinese consumers continue to rate Chinese sportswear brands, such as Li Ning, as online or better than Western brands. However, he said Nike and Adidas seem to be in a relatively good position.

Wholesale Distribution Plans

Nike’s commentary on its relationship with its wholesale partners is also on the radar of analysts and investors. The athletic shoe giant has pursued a clear shift towards selling more of its footwear and apparel directly to consumers, rather than through third parties, in a bid to boost profits and grow increase brand affinity.

Foot Locker, one of Nike’s largest supplier partners, revealed in late February that its composition of Nike sales would drop from 65% in Q4 2021 to 55% in Q4 2022, with a chance it could drop even further. low. .

Credit Suisse analysts have estimated that this could represent a loss of between $600 million and $800 million in wholesale revenue for Nike in fiscal 2023.

“While we don’t think Nike would pivot so quickly to disrupt Foot Locker’s cash flow in such a significant way, we understand why Nike would want these sales to be represented through its own channels,” the Credit Suisse analyst said. Michael Binetti.

As of November 30, direct-to-consumer revenue represented approximately 41% of Nike’s overall business. Investors will be looking for more color on how that number might continue to rise from here and which partners Nike will remain most reliant on.