Nike shares take hit after underwhelming results, UBS still keen

(Alliance News) - Nike Inc shares plummeted in New York on Friday, a day after the Oregon-headquartered sports apparel retailer reported a dip in first-quarter profit on lower margins.

Shares were down 11% at USD84.45, adding to the 49% slump seen in 2022. The stock is now at lows not seen since April 2020.

Despite the hit to the shares, UBS reiterated its 'buy' recommendation - but did lower its price target to USD141 from USD156 previously.

"Our view is Nike's Consumer Direct Acceleration strategy is the right one and its China business will continue to rebound," UBS said.

Nike reported a pretax profit of USD1.83 billion in the quarter that ended August 31, down 13% from USD2.11 billion a year before.

The company's gross margin decreased 220 basis points to 44.3% from 46.5%.

UBS said the results do not deter it from its 'buy' rating.

"Our view is what matters most for stocks is the 'rate of change' in the macro environment. The market is not likely to see an inflection soon and this likely weighs on all 'softlines' stocks, including Nike. Plus, even though Nike made positive statements about its long-term outlook, we think the market will discount these comments because of Nike's FY23 guide-down and inventory situation," it explained.

Revenue rises 4% to USD12.69 billion from USD12.25 billion, led by growth in North America, Europe, the Middle East & Africa and Asia Pacific and Latin America, which was partially offset by declines in Greater China, however.

Revenue for the Nike brand was up 4% to USD12.0 billion, while revenue for Converse grew 2% to USD643 million.

"Our strong start to financial 2023 highlights the depth and breadth of Nike's global portfolio, as we continue to manage through volatility," Nike President & Chief Executive John Donahoe said.

"Our competitive advantages, including the strength of our brand, deep consumer connections and pipeline of innovative product, continue to prove that our strategy is working. We expect our unrelenting focus on better serving the consumer to continue to fuel growth and create value like only Nike can," he continued.

UBS has lowered its financial 2023, 2024 and 2025 earnings forecasts, but still feels the stock can hit USD141.

It continued: "Nike's stated intention of using promotions to clear excess apparel inventory in North America this Holiday season is a negative for other apparel-focused 'softline' stocks, in our view. It likely means the promotional environment is going to be worse than expected for the entire industry."

Looking ahead, UBS believes Nike will benefit from fewer promotions and lower freight costs.

By Paul McGowan; [email protected]

Copyright 2022 Alliance News Limited. All Rights Reserved.