Morgan Stanley analyst Alex Straton reiterated an Overweight rating on the shares of Nike Inc (NYSE: NKE) with a price target of $130.
At first glance, Nike appears set up well to beat a low bar guided for 4Q, said the analyst.
The company's 4Q guidance appears even more achievable or beatable when considered against the fact that 80% of the analyst's Softlines Retail & Brands coverage surpassed Street 1Q23 expectations on both topline & margin upside.
The analyst noted that if NKE were to print revenue growth in line with the year's 4 year CAGR thus far, realize 43.5% guided gross margins, & grow SG&A in line with expectations, could see a 75 cents plus EPS result, well ahead the Street's 67 cents.
That said, recent NA & Europe sportswear channel checks make it clear that demand for mass sportswear has potentially slowed, leaving a sizable inventory glut across the industry that is currently being promoted away, added the analyst.
The condition, said the analyst, could become a potential headwind pressurizing revenue & margins, & thus, 4Q EPS, below the Street view.
While sporting goods inventory levels have moderated somewhat, normalization is not expected until late 2023 or even early 2024.
The analyst believes prioritizing the wholesale channel to clear inventory could not only prove temporary, but a healthy sign of NKE adapting properly in order to execute on expanding its DTC business L-T without tarnishing brand health in the N-T.
While the macro backdrop in China is a legitimate concern, the analyst's channel checks suggest sportswear spend remains robust, & local brands remain too small to impact NKE orders for now.
How NKE discusses wholesale strategy, inventory, China, & L-T margin targets are more likely to move the stock after the earnings, the analyst concluded.
Price Action: NKE shares are trading lower by 3% at $110.16 on the last check Tuesday.