Headquartered in Beaverton, Oregon, NIKE, Inc. (NKE) is the world's largest supplier of athletic shoes and apparel and a major manufacturer of sports equipment. NKE shares have gained 16.9% in price over the past year and 17.1% year-to-date to close yesterday’s trading session at $165.67. However, the shares are trading below their 50-day and 200-day moving averages.

Despite supply chain issues, factory closures, and slowed inventory shipments, the company reported better-than-expected fiscal 2022 financial results for its second quarter. NKE’s revenue increased 1% year-over-year to $11.36 billion, outpacing estimates of $11.25 billion. The increase was driven mainly by NIKE Direct growth and robust consumer demand in North America, NKE’s biggest market. However, production shortages due to Vietnam factory closures, lower available inventory, and other COVID-19 related restrictions in China have led to a significant decline in sales in the country, which is a crucial region in NKE’s growth trajectory. Nevertheless, the company’s EPS came in at $0.83, versus a $0.63 consensus estimate and NKE shares jumped in price on the upbeat earnings release.

Chief Financial Officer Matt Friend stated that Vietnam factories had resumed production, and their global supply levels are expected to normalize heading into fiscal 2023. However, the company expects its supply chain costs for the fiscal year to be higher than it had anticipated three months ago. NKE has reduced its revenue forecast for the fiscal year and now expects mid-single-digit revenue growth, citing labor shortages and production disruptions. The company expects low-single-digit sales growth rate for the current quarter.

Here is what could shape NKE’s performance in the near term:

Stretched Valuation

In terms of forward EV/Sales, NKE is currently trading at 5.51x, which is 285.2% higher than the 1.43x industry average. Also, its 45.00 forward P/E ratio is 184.3% higher than the 15.83 industry average. NKE’s forward Price/Sales and Price/Book are 370.9% and 455.2% higher than the 1.18x and 3.37x respective industry averages.

Attractive Shareholder Returns

For the fiscal second quarter, NKE repurchased $968 million of shares, representing 6.0 million shares retired as part of its four-year, $15 billion program. As of November 30, the company repurchased 60.8 million shares under the program for approximately $6.4 billion. Furthermore, NKE has a record of 20 consecutive years of increasing dividend payouts. The company’s dividend payout has increased at an 11.3% CAGR over the past three years and at an 11.4% CAGR over the past five years. NKE paid $437 million in dividends for the quarter, representing a 14% increase from the prior-year quarter. In addition, NKE approved a $0.305 per share quarterly cash dividend, payable on December 28, 2021. This represents an 11% increase from the prior quarter’s dividend rate.

Mixed Prospects

Analysts expect NKE’s revenues to rise 5.8% in the current year and 14.3% next year. The consensus EPS estimates indicate a 4.2% year-over-year improvement in the current year and a 30.5% rise next year. However, its EPS is expected to decline 21.1% year-over-year in the current quarter, ending February 2022.

However, the omicron variant threatens global recovery and may lead to prolonged supply chain issues and cost pressures. Nevertheless, many countries are tightening restrictions and imposing targeted lockdowns to contain the variant’s spread, which could lead to the lessening of production shortages.

POWR Ratings Reflect Uncertain Prospects

NKE has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of D for Value, which is consistent with its stretched valuation.

NKE has a C grade for Stability. Its beta of 0.94 justifies this grade.

Of  37 stocks in the B-rated Athletics & Recreation industry, NKE is ranked #22.

Beyond what I have stated above, one can also view NKE’s grades for Quality, Growth, Momentum, and Sentiment here.

View the top-rated stocks in the Athletics & Recreation industry here.

Bottom Line

As a renowned sportswear retailer, NKE is expected to grow at a stable rate over the long term. However, its near-term prospects look uncertain. Analysts expect its EPS to decline in the current quarter. Furthermore, its relatively high beta indicates volatility. The company has also cut its revenue forecast and expects a single-digit growth rate for the fiscal year. And supply chain issues could persist in the coming months. Thus, it could be wise to wait for its prospects to stabilize before investing in it.

How Does NIKE, Inc. (NKE) Stack Up Against its Peers?

While NKE has an overall POWR Rating of C, one might want to consider looking at its industry peers, Academy Sports & Outdoors Inc. (ASO) and Vista Outdoor Inc. (VSTO), which have an A (Strong Buy) rating.

NKE shares rose $0.45 (+0.27%) in premarket trading Monday. Year-to-date, NKE has gained 18.31%, versus a 28.03% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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