On June 27, athletic lifestyle retailer Nike (NYSE: NKE) reported better-than-expected results for the fourth quarter of Fiscal 2022, which ended May 31. Nonetheless, both the top and bottom lines declined on a year-over-year basis.
This, combined with a weaker-than-expected gross profit margin, did not sit well with investors and traders struggling to make decisions in a highly volatile environment. As a result, shares of Nike declined 2.89% in Monday’s after-hours trading session.
Expert Points Out Concerns
After carefully following management’s commentary and diving deep into the company’s fundamentals and developments, Deutsche Bank analyst Gabriella Carbone compiled key takeaways.
She noted that the inflation and supply disruptions aggravated by China’s COVID-led lockdowns were big negative forces in Nike’s Q4. The company engaged in taking targeted actions to manage the supply-demand balance in Greater China after the lockdown led to disruptions. These actions led to an elevation in costs related to freight and logistics, keeping its gross margin under pressure.
Carbone preferred to remain on the sidelines regarding China’s volatile demand trends this year. “Moving ahead, NKE is taking a cautious approach to China given uncertainty in the region and the potential need for further actions to manage supply and demand as management is prioritizing the return to a healthy pull market in China at the end of 2Q,” explained the analyst.
Moreover, she identified a demand deceleration in the athletic category as well as higher investment costs as major risk factors to the company’s prospects.
The Upsides
Nonetheless, the analyst was upbeat about several sustainable upsides that are going to show results over the longer term. Nike’s brand value, customer experience, and strong digital capabilities continue to attract customers, and Carbone thinks these are going to be long-term growth drivers.
“That said, we continue to view NKE as a best-in-class retailer with a strong positioning in apparel and footwear, which is being further magnified by the company’s strong digital capabilities. In addition, we believe NKE’s deep connection with its customers separates it from its peers, especially as consumers continue to gravitate towards brands that provide a unique experience both in stores and online,” noted Carbone.
The analyst reiterated a Buy rating on the NKE stock but slashed the price target to $130 from $152.
Wall Street’s Take
On Wall Street, bullish analysts are outnumbering the skeptics, giving the NKE stock a Moderate Buy consensus rating based on 16 Buys, seven Holds, and one Sell. The average Nike price target is $132.05, indicating upside potential of 29.2%.
Bottom Line
Overall, despite near-term headwinds, Nike’s brand value and loyalty among customers, strong digital presence, as well as top-class customer experience in physical stores are expected to continue driving revenues for the company.