Is the consumer under pressure? That may be the key question heading into 2024. Retail spending has been stout since the middle of the year, all while pundits have poked holes in household balance sheet trends, including the excess savings figure across income cohorts. Still, holiday spending trends appear generally impressive, even as the consumer prefers experiences and services over goods β that trend could be slowly reversing.
Following a weak outlook, I see some risks in shares of Nike Inc. (NKE, Financial). The valuation appears fair to me at current levels, while the technicals are lukewarm at best as 2024 approaches.
Company description
According to Bank of America Global Research, Nike is among the leading athletic footwear and apparel companies in the world. It designs, develops, markets and sells its products across international markets. With about 40% of global market share in the footwear market, the company commands a heavy presence with its Jordan brand, Converse line and Nike golf shoes, among other athletic apparel. It produces and distributes through independent contracts while sourcing abroad.
Key data
Sporting a $164 billion market cap, the Oregon-based apparel and footwear company within the consumer discretionary sector trades at a high 29.8 forward price-earnings ratio and pays a modest 1.4% dividend yield as of Dec. 22. Following a disappointing second-quarter earnings report, shares trade with a low implied volatility percentage of 21%, while short interest on the stock is low at just 1.3%.
Color on the quarter
Earlier this month, Nike issued a mixed second-quarter report, but it was some of its internal numbers that resulted in a very poor stock price reaction. Second-quarter GAAP earnings of $1.03 per share topped the Wall Street consensus estimate of 85 cents, while revenue of $13.4 billion, up just 0.5% compared with year-ago levels, missed by $40 million. On a constant currency basis, net sales for the quarter declined 1% year over year. The results themselves were not all that bad, but it was the company's second-half outlook that drew concerns among investors. Having just completed its second quarter, all eyes were on the guide for the balance of fiscal 2024.
The management team lowered its outlook for the year due to weakness in China and emerging markets writ large. Its digital channels, key for future sales growth, were also cited for weakness and had its growth forecast slashed. What should have assuaged some shareholder concerns was the good news that the company was undertaking a cost-cutting initiative and reported margins that were actually quite healthy β Nike's earnings beat was largely the result of a margin beat, while selling, general and administrative costs were in check. The company now sees $3.48 of 2024 operating earnings per share, reflecting a third quarter restructuring charge.
The goal is to accumulate $2 billion in cost savings over the next three years, with that potential cash flow being reinvested in growth opportunities. Something to watch for will be how the China market unfolds in the coming quarters β sales from that geographic segment rose 8%, below the 10%-plus forecast. With growth under pressure, the high-20s earnings multiple appears rich.
Competitor analysis and risks
Compared to its peers, Nike has a premium valuation with above-average growth prospects. Still, it is among the most profitable athletic footwear and apparel companies in the world and earnings per share revisions have been decent as of late, with a soft quarterly report notwithstanding. Finally, share price momentum has turned weaker compared with its retail peers. Key risks for Nike include adverse growth shifts in China, weakness in the company's direct-to-consumer business and unfavorably currency changes.
Valuation
On valuation, analysts at Bank of America see earnings rising nearly 8% this year with strong earnings per share growth expected in 2024 and 2025. The current consensus forecast calls for normalized earnings per share growth of around 15% over the next three fiscal years, while the top line advances at a single-digit pace. Dividends, meanwhile, are expected to rise very steadily as the company focuses on cutting costs and reinvesting capital. With a forward enterprise value/Ebitda multiple of 23, prospective shareholders must still pay a significant valuation premium compared to the broad market and consumer discretionary industry. Nike remains solidly free cash flow positive, though, with $2.89 of free cash flow per share over the last 12 months.
If we assume $4 of operating earnings per share over the next four quarters and apply a price-earnings multiple of 26, then shares should be between $100 and $110. If we assume the consensus earnings per share growth rate going forward, near 15%, and a sector-median PEG ratio of 1.6, then that valuation appears fair to me. Thus, I see the stock near fair value today amid what appears to be both rising macro and company-specific issues heading into the 2024 calendar year.
Nike: Earnings, valuation, dividend yield and free cash flow forecasts
Source: BofA Global Research
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed third-quarter 2024 earnings date of Thursday, March 21. A quarterly dividend of 37 cents will be paid on Tuesday, Jan. 2. No other volatility catalysts are seen on the calendar.
Corporate Event Risk Calendar
The technical take
An important pattern is emerging in the chart of Nike. Notice in the graph below that a series of lower highs has been established while prices on pullbacks may be consolidating after hitting a low in October 2022. Shareholders and those looking to enter the stock should wait for either a bullish breakout or a decent risk-reward level at which to buy on a further decline. As it stands, support is near $95 β and that is a key spot because there is an old earnings-related price gap right near that level ($89), so scooping up shares on a retest under $100 could make sense.
On the upside, a rally through $125 to $130 would help confirm the bulls have overtaken the reins from the bears. Still, considering that Nike's long-term 200-day moving average is flat in its slope, there is no clear trend right now. The short-term 50-day moving average may be about to cross above the 200-day moving average in a bullish golden cross feature, but that could be short-lived following the stock's second-worst single-day move since 2008. That major down day took all the steam out of the relative strength index momentum oscillator (at the bottom of the graph). Finally, there is a high amount of volume by price starting at around $95, so we could be in a trading range for a bit here as the bulls and bears continue to battle it out.
Overall, buying on a pullback into the low-mid $90s appears as a better risk-reward strategy today while momentum traders could wait for a breakout above the noted resistance levels.
Consolidation pattern emerging, shares back away from resistance on high volume
The bottom line
Nike continues to face challenges at the economy-wide level as well with its own operations, it appears. While gross margins were healthy, issues out of China, among other challenges, led the management team to focus on cost-saving plans rather than going for growth in 2024. The valuation appears fair while the technicals are mixed heading into next year.
