Nike's Inventory In Focus & Slight Beat In Q2 Likely, Says Analyst - Nike (NYSE:NKE)

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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