By Teresa Rivas
Nike shares were higher on Monday, and at least one analyst thinks the company can snap its losing streak ahead of earnings next week.
The stock was up 2.3% to $101.50 after Guggenheim analyst Robert Drbul named Nike shares his Best Idea, writing he sees it breaking out in 2024.
He reiterated a Buy rating and $130 price target on the shares, arguing Nike’s recent underperformance — down more than 7% year to date — creates a compelling entry point. He believes “management is laying the groundwork for many launches of product to deliver an acceleration in top line growth in the second half of 2024 and into 2025.”
In particular, Drbul is upbeat about Nike’s ability to make a comeback in the running category — a space that has become increasingly competitive with entrants such as On Holding and the Hoka brand from Deckers Outdoor. He notes the latest iteration of the company’s Pegasus and Alphafly sneakers are due in April, which could help it recapture some momentum.
This comes as supply chains and freight costs have eased, while Nike’s ability to raise prices could contribute to stronger margins.
In addition, he thinks Nike’s Jordan brand is still a winner, and the company as a whole will be highly visible at this summer’s Olympic Games — not only at the traditional high-profile track and field events, but also in the first-ever break dancing competitions.
More immediately, Nike’s fiscal third-quarter results are due out after the bell March 21. Investors may be understandably nervous, given Nike’s previous December report caused the stock to suffer its biggest drop in more than a year, from which it has yet to recover.
Drbul estimates revenue will decline slightly, to $12.36 billion, with earnings per share coming in at 83 cents. That puts him ahead of consensus estimates, which call for revenue of $12.26 billion and earnings per share of 75 cents.
While a slight majority of analysts are still bullish on the stock, the average analyst price target has edged lower since the start of the year, to a recent $121.45.
Some on the Street might be feeling guarded about the quarter, given rival Adidas was cautious about the outlook for the North American market last month.
Nor can Nike count on China picking up the slack. Bernstein analyst Aneesha Sherman reviewed the Chinese retail landscape on Monday, writing that given that nation’s slower economic recovery and a decline in demand, investors may have to temper their expectations.
Whereas just a few months ago estimates held Nike could count on sales increasing in the low double-digits this year, lower demand means that a high-single digit increase in sales for 2024 is looking more likely.
“Current performance is below trend, which suggests that unless it accelerates we may see more discounting through the year,” Sherman writes. “Inventories are not an issue but the issue is demand trends.”
Nike isn’t the only multinational seeing lower demand in China, and Sherman isn’t concerned enough to get less constructive on the shares. She reiterated an Outperform rating and $134 price target.
Nonetheless, she notes the “lack of improvement in manufacturing data suggests that order books for Western brands have not picked up yet, which echoes what we heard from our channel checks that retailers are cautious and ordering/demand chasing is more likely to be back half weighted.”
Of course, that comeback in the second half of the year could be in the cards, particularly if, as Drbul predicts, a refresh of popular models in the spring and a high profile at the summer Olympics resonates with consumers.
But at the moment, Nike shares have been hit hard and investor expectations are tepid. If its quarter and forecast are better than feared next week it could give the stock a boost.
Ultimately, Drbul concludes that although Nike is being affected by short-term operational dynamics, “the long-term financial framework the company laid out in 2021 remains quite attainable, but could take longer than we previously anticipated.”
Next week’s results will help investors gauge how much more patience they might need.
Write to Teresa Rivas at teresa.rivas@barrons.com