On Monday, Telsey Advisory Group adjusted its shares price target for Nike Inc (NYSE: NYSE:NKE), lowering it to $120 from the previous $140 while maintaining an Outperform rating on the stock. The adjustment follows a series of challenges faced by the brand, including a reduction in FY24 guidance announced in late December, increased competition from other athletic brands, and scrutiny over product innovation and quality.
Nike has recently introduced the Air Max Dn and is increasing shelf space for its signature basketball products, signaling a push for innovation and market presence. Despite losing market share in everyday running, the company is planning significant product launches in the first half of calendar year 2024 and throughout 2025. Additionally, Nike is undertaking a $2 billion cost reduction plan and has improved inventory management, which is expected to reduce the need for markdowns.
For the third quarter of fiscal year 2024, projections indicate a slight sales decline of 0.4%, which is less than the anticipated 0.9% decrease according to FactSet consensus. The company is expected to experience low currency-neutral (CC) growth of 1.7%, a decrease from the previous year's strong performance.
However, gross margin is projected to expand by 190 basis points year-over-year to 45.2%, aligning with FactSet's estimates. This margin improvement is attributed to supply chain cost benefits.
Despite these positive aspects, Nike's operating expenses are anticipated to rise by 12%, including a restructuring charge, which will result in a 400 basis point deleverage to 36.0%, higher than FactSet's projection of 34.5%. Consequently, operating margin is expected to contract by approximately 210 basis points to 9.3%, below the FactSet consensus of 10.7%. Earnings per share (EPS) estimates stand at $0.67, factoring in the restructuring charge, compared to FactSet's expectation of $0.75.
Nike is likely to reaffirm its December guidance, which includes sales growth of around 1%, gross margin expansion of 140-160 basis points, and a mid-single-digit increase in selling, general and administrative (SG&A) expenses, inclusive of $400 million to $450 million in restructuring charges.
The reassessment of Nike's price target to $120 is based on a price-to-earnings (P/E) multiple of approximately 28 times, a reduction from the previous 33 times, applied to the FY25 EPS estimate of $4.20, slightly down from $4.25. This multiple is consistent with the stock's current trading levels on FactSet FY24 EPS estimates.
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