- Morgan Stanley analyst Alex Straton reiterated an Overweight rating on the shares of Nike Inc (NYSE:NKE) and raised the price target from $120 to $127.
- The analyst said stronger-than-expected topline results from most global brands & encouraging intra-quarter commentary suggested the strong demand & exit rate noted on Nike’s fiscal Q1 earnings call has likely continued through the quarter.
- However, the analyst added, any potential topline upside could be offset by ongoing China softness, & ASP pressure from elevated discounting in NA, resulting in-line with Street expectations for Q2 total revenue.
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- The analyst expects Nike to likely take advantage of potentially stronger-than-expected NA sportswear demand to clear through excess apparel inventories.
- Straton forecasts Q2 gross margin (GM) to decline about 400 basis points y/y, 20 basis points below the Street & at the lower bound of management guidance.
- Despite in-line topline & lower GM forecasts, the analyst sees room for Nike to flex its SG&A spend below Street estimates to offset some of the outsized discounting-related sales/GM pressure.
- The analyst anticipates lower SG&A spend is enough to offset China softness & NA promotional pressure, enabling the company to deliver $0.67 in 2Q23 EPS, 5% ahead of the Street at $0.64.
- Even if a Q2 EPS beat fails to materialize due to deeper discounting-related GM pressure, the analyst does not necessarily view that as a negative for the stock.
- The analyst said GM and inventory levels are the key Q2 unknowns but are the key to how the fiscal year will unfold.
- The analyst expects guidance reiteration, especially considering recession fears, uncertainties around excess inventory, & limited visibility in China.
- Expensive valuation, China trajectory uncertainty, recession fears, & DTC transformation skepticism likely continue to weigh on the stock post-print, though better inventory visibility may be enough for select investors to step in, the analyst said.
- Also Read: Nike Cuts Ties With NBA Player Kyrie Irving
- Price Action: NKE shares are trading lower by 0.36% at $111.67 on the last check Tuesday.
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