Why Goldman Sachs Still Buying Nike Amid Choppy North American Waters

The fourth-quarter results from Nike Inc NKE showed "deteriorating trends" in North America, despite solid momentum overseas.

The stock fell initially after the results as the market became skeptical over the company's outlook for high-single-digit reported sales growth and 30-50 bps of gross margin expansion over the next 12 months amid current business weakness.

But, Goldman Says Buy

But, Goldman Sachs reiterated its Buy rating on the stock, saying, "Tevenue targets look achievable, valuation has compressed to 22X NTM P/E, and NKE is likely to be supported by a flight to quality against a volatile macro backdrop."

Despite acknowledging downside risks, analyst Lindsay Drucker Mann believes sales targets are achievable based on "(1) mid-single-digit N. Am sales in 4Q after adjusting for shipment timing, (2) continued progression in normalizing N. Am inventory levels, and (3) strong momentum overseas."

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However, the analyst cut FY17/18/19 EPS estimates to $2.35/$2.67/$3.02 from $2.40/$2.72/$3.14 to reflect weaker first-quarter margin expectations and to taper North America sales growth expectations slightly.

Nike's results were watched closely amid restructurings by The Sports Authority and Vestis Retail, weak comp store sales trends from Nike's biggest retailer Foot Locker, Inc. FL and excess inventories in the channel.

Looking Forward

North America is soft, but Nike believes it's bottoming. Nike's own direct to consumer business was up 17 percent. International revenues were strong, with Western Europe revenues growing 19 percent.

At time of writing, Nike shares were up 2.86 percent on the day, trading at $54.62. Drucker Mann trimmed price target to $66 from $67.