Ben Hoskins/Getty Images for Nike & Michael J Fox Foundation
stock is up 15%, on track to post its biggest single-day gain since March 24, as investors digest its latest financial results. But even with that gain, the shares are lagging behind the
year to date.
Three factors have contributed to the surge and raise the possibility that the shares could catch up to the broader market.
The first is that Nike’s problems with boycotts in China appear not to be as bad as feared. CEO
John Donahoe
acknowledged that the boycotts, in response to Nike’s decision to investigate its supply chain to address concerns surrounding the use of forced labor of Uyghurs in Xinjiang, have hurt sales. The company suspended marketing and product launches in Greater China, but Donahoe also said that sales in the area were improving.
So far in June, retail sales are approaching the level last year, he said. Jefferies analyst Randal Konik said in a research note that he thinks the brand is still performing well, raising his target for the stock price from $192 to $200.
Nike stock was up 15%, at $153.50, in afternoon trading. The S&P 500 had gained 0.3%.
Second, Nike was able to increase both revenue and margins to levels seen before the Covid-19 pandemic. That means the company’s pricing power remains strong, said Konik. He also noted that Nike’s best-in-class direct-to-consumer model will continue to allow the company to reach higher levels of profitability.
JPMorgan analyst Matthew Boss said management’s focus on more durable, seasonless inventories would lower the risk of markdowns and further improve margins.
As Covid-19 restrictions are lifted and in-person sporting events resume, management indicated, selling and general administrative expenses would normalize and “slightly” outpace revenue growth. By increasing marketing spending, Nike could be able to continue to build out its brand and leverage its pricing power into larger margins.
Nike’s financial forecasts provide a final reason for optimism. For fiscal 2022, management predicted revenue growth in the low double digits, with annual growth in the high single digits to low double digits in the years leading up to 2025.
In a sign that margins could keep growing, management expects Nike Direct—its direct-to-consumer online sales segment—to account for 60% of revenue by 2025, from 40% now. The company said revenue growth in China could range from the low to mid teens over the long term, a conservative call considering that annual revenue growth in the area has exceeded 20% multiple times over the past five years.
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