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Nike shares slide as Morgan Stanley highlights potential inventory challenges

Published 20/06/2023, 10:42 pm
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Nike (NYSE:NKE) shares are down more than 2% premarket on the back of a note from Morgan Stanley that stated near-term inventory challenges could see the sportswear giant's 2024 guide potentially below consensus expectations.

Analysts, who have an Overweight rating and $130 price target on Nike heading into its earnings next week, clarified that the company's 4Q EPS likely comes in in line with the Street, if not ahead.

Morgan Stanley is expecting a "mostly in-line 4Q," with a low topline bar, although they note that "inventory challenges could weigh on margins."

"At first glance, NKE appears set up well to beat a low bar guided for 4Q," the analysts wrote. "More specifically, 4Q guidance included 1) a notable q/q topline deceleration (+14% y/y in 3Q to 4Q guided flat to +LSD% y/y implies >1,000 bps decel at the midpoint), which would equate to NKE's lowest y/y & 4Y CAGR growth rate for the year, despite building momentum when exiting the quarter."

"And 2) a ~HSD % 4Q EBIT margin, which would also make for NKE's lowest quarterly margin of the year, & contrasts historical trend, which suggests 4Q EBIT margin could land closer to the +DD % range."

The analysts also noted that recent North American and Europe sportswear channel checks make it clear that "demand for mass sportswear has potentially slowed, leaving a sizable inventory glut across the industry that is currently being promoted away."

As a result, this could pressure Nike's revenue and margins, potentially putting its 4Q EPS below the Street, they said.

However, they believe that "while NKE's 4Q topline & GM are not without risk given macro & industry-dynamics, it seems demand & promotional headwinds could be partially made up for with prudent SG&A expense management."

"Altogether, despite multiple scenario analyses outlining the aforementioned upside & downside risks, it appears the Street's 67c 4Q EPS forecast is fair for now, & we model 68c," the analysts concluded.

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