Supply Chain Issues Threaten Nike’s Growth
Nike (NYSE: NKE) is a great company and one with a robust outlook but it is suffering the same supply chain issues as many of its globally focused brethren. The company reported a fantastic quarter but one hampered by supply chain challenges that cut into both the top and bottom lines. This is resulting in a downward revaluation of the stock by the analysts and that is sending share prices lower. One stock does not make a trend in the market, but there have been half a dozen or more reports this week alone reflecting the same issues. If these issues persist into the peak of the Q3 earnings cycle, we see the broader market correcting has deeply or deeper than Nike. Nike is down almost 15% and heading lower.
Nike’s Woes Will Persist For Several Quarters
Nike didn't have a bad quarter by any means, the company reported top and bottom-line growth and margin expansion along with significant improvements in direct-to-consumer sales and demand across all channels. The bad news is that revenue missed the analyst consensus due to supply chain issues and the outlook is unfavorable. Supply chain issues have yet to be resolved and, once they are resolved, could impact the company's inventory levels for several quarters at least.
Nike reported $12.25 in net consolidated revenue for a gain of 15.6% over last year and 2019. The revenue missed the consensus by $220 million or 170 basis points. 170 basis points isn't a lot in light of the company's strong performance but are enormous for a market expecting the average S&P 500 company to outperform consensus estimates by double digits. Internally, Nike’s direct sales increase by 28% over last year to account for more than 33% of the net. Within that, digital sales are up 29%.
Turning to the earnings, the company was able to increase its margins by 170 basis points on the combination of pricing power, mix, and revenue strength. This helped to drive better than expected results on the bottom line with GAAP earnings of $1.16 exceeding the consensus by $0.04.
The Analysts Cool On Nike
The analysts are still overwhelmingly bullish on Nike, don't get us wrong, but the sentiment is starting to sour. Four sell-siders have come out in the wake of the report lowering their price target to a consensus near $175 and in line with the Pricetargets.com analysts consensus. BTIG analyst Camilo Lyon thinks the cloudiness brought into the outlook by the Vietnamese shutdowns and global supply chain issues have Nike set up for a multiple contraction in the near term at least. Nike is a highly valued stock trading at 38X its earnings.
"While NKE innovation and overall demand trends are strong, the lack of visibility into when (duration) and how quickly (magnitude) the production in Vietnam can ramp back to full capacity will likely keep the stock under pressure and subject to multiple compression,"
The Technical Outlook: Nike Plunges And breaks Support
Shares of Nike got more than 6% lower on the news to not only confirm resistance at the short-term moving average but break a key support level. With price action trading below the $152 level, Nike appears to be in the midst of an Island Reversal. In this case, we would expect to see Nike retreat back to the last major level of support near the $130 level.
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