Argus downgrades Nike to hold, suggests short-term marathon, not sprint – 24/7 Wall St.

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Argus Research analysts downgraded retail and manufacturing giant Nike Inc. (US:NKE) to hold the buy. They said the company would have to discount overstocked inventory, which would eat away at gross margins.

The downgrade follows Nike’s generally positive results for the fiscal first quarter, including revenue and earnings per share above Wall Street consensus estimates. Revenues broke $400 million and stood at $12.68. better-than-expected North American sales offset weak sales in China.

“Nike Direct sales increased 8%, while reported China revenue fell 16%. Reported gross margin increased from 46.5% to 44.3%, reflecting higher freight and logistics costs, increased markdowns and foreign exchange headwinds, partially offset by higher selling prices. The consensus estimate called for a gross margin of 45.3%,” the report notes.

Nike also resumed share buybacks and repurchased $1.0 billion of its stock in the fiscal first quarter.

According to Argus, the company is also facing rising costs and currency headwinds.

Analysts are more optimistic about Nike in the long term. They believe the company still dominates the athletic apparel and footwear market and holds a substantial advantage with its extensive list of sports star endorsements.

“While the industry remains fiercely competitive, we expect the company to build on its dominant position through its globally recognized brand, innovative products, economies of scale and rapid growth in emerging markets. “, wrote the analysts.

Bottom line: some pain is on the way.

Based on Argus that Nike needs to cut prices to eliminate inventory, the company lowered its earnings per share estimate for fiscal 2023 to $4.00 from $4.05 and fiscal 2024 at $4.30 instead of $4.40.

“Over the long term,” the analysts write, “we expect Nike’s growth to be driven by the Jordan brand, which accounts for more than 12% of sales; continuous innovation; the expansion of e-commerce sales and the resumption of growth in China.

The report says Nike has a strong balance sheet with only moderate debt and enough cash to cover its current obligations.

Long-term debt stood at $8.9 billion at the end of the quarter, giving it a debt-to-equity ratio of 36.0%.

Cash and cash equivalents and short-term investments fell to $11.9 billion at the end of 1Q23 from $13.7 billion a year earlier. Inventories are up 44% from a year ago.

NKE shares are trading at 21 times Argus’ FY2023 EPS estimate. He notes that it sits near the bottom of their historical five-year range of 20-39 and below the average of their peers.

“We believe the current multiple adequately reflects the outlook for tighter margins, high transportation costs and exchange rate headwinds,” the Argus researchers concluded.

Shares of Nike rose more than 2% on Monday, but fell back a dime in after-hours trading to $85.39, closer to its 52-week low of $82.22 than its 179.10 $.

This article was originally published on Fintel

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