Nike Cannot Keep Up With Demand

Nike’s fiscal 2022 (August-ended) first-quarter results were mostly in line with our estimates but were overshadowed by its supply chain woes. While its 16% sales growth in the quarter barely missed our 18% forecast, the firm now anticipates virus-related factory closures in Asia (especially Vietnam) and shipping and distribution delays will result in fiscal 2022 sales growth in the mid-single-digits, short of our 13% estimate. Under normal circumstances, about half of Nike’s footwear and 30% of its apparel production is sourced from Vietnam, so it cannot fully overcome the shutdowns of many factories that have plagued the nation since July. Nonetheless, we believe the underlying demand for Nike’s products and its brand power, the source of our wide moat rating, are very healthy and do not expect to make any significant change to our per share fair value estimate of $128. We would, however, look for a more attractive entry point.

Nike’s profitability in the first quarter exceeded our forecast despite the slight revenue miss as the activewear market has been uncommonly favorable. Many industry participants have reported very low discounting due to high consumer demand at a time of low retail inventories. Nike, in turn, reported more than 65% full-price realization, resulting in a 46.5% gross margin that eclipsed our 46.0% forecast despite shipping surcharges. We do expect to reduce our full-year gross margin forecast due to the anticipated slow sales, but only by about 20-30 basis points as we believe its pricing will remain high. Further, Nike’s 17% operating margin in the quarter beat our estimate by 2 percentage points as marketing and other operating expenses were below our expectations. All told, its $1.16 in EPS beat our forecast by six cents.

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