Nike’s miss could be our opportunity

Key Points

• Nike's recent report spooked investors, and shares fell hard in the after-hours session.
• They missed on revenue, and management guided lower for the coming quarters. 
• However, some bright spots, such as their margins, made things interesting heading into 2024.

The big swoosh is set to look a little deflated heading into 2024 after Nike Inc NYSE: NKE reported its fiscal Q2 earnings last night. Shares had been rallying since the end of September, gaining close to 40% through yesterday's close, so expectations were clearly high for a strong result. That would have been a decent end to the year for the company, whose shares saw a fair degree of volatility throughout 2023. 

Instead, it looks like that’s set to continue for the time being at least, as Nike stock plummeted more than 11% in Thursday’s after-hours session. While the company managed to beat analyst expectations for both its margins and its earnings, the latter of which came in 20% higher than the consensus, it missed the mark on revenue for the quarter.

Making matters worse, management issued cautious guidance for the next two quarters, something the market takes very seriously and views very negatively.

Just as Nike shares were set to finish the year flat, if not marginally up, they’re now looking at a second consecutive year of losses. They fell to $108 in the after-hours session, which effectively puts them back at pre-pandemic levels heading into 2024. 

Cautious guidance

The lower guidance is indicative of how concerned the company is by global economic challenges, even with inflation looking more and more likely to continue receding through next year, with equities rallying hard. As a result, Nike is forecasting economic headwinds from China and Europe. They missed revenue expectations for the former, while the latter saw just 2% growth compared to the 13% from their Asia Pacific & Latin America segment. Coupled with the fact that they’re also not forecasting any let-up when it comes to their ongoing supply chain issues, they’re understandably pessimistic. 

However, management isn’t just sitting back and watching this unfold. They took the opportunity last night to kick off a company-wide drive for efficiency. They’re looking to streamline operations by reducing management levels, overhauling the product range, and boosting automation through the use of technology.

There have already been reports in recent weeks of the company laying off employees as cutting budget spend across most departments. All told, the company is aiming to generate around $2 billion in cost reductions from the broader initiative. It’s an admirable stance to take, but such a defensive mindset will be tough for investors to digest, especially at a time when so many stocks are tracking back toward their all-time highs. 

Buying opportunity

So, for those of us on the sidelines, could this unexpected drop be the start of a buying opportunity at Nike? There’s certainly an argument to be made there, especially with the strong margins reported last night in the face of a revenue miss and the cost-cutting initiative that’s getting underway.

For context, Nike’s margins had been declining in the previous six reports heading into last night, so perhaps all is not lost, and there are some bright spots to be seen. It will likely take a few sessions, if not a few weeks, for management’s cautious outlook to be fully digested and priced into shares, but at some point, Nike will become a good buy again.

With a price-to-earnings (P/E) ratio of 37 heading into last night’s release, there’s also an argument to be made that Nike shares were perhaps a little overvalued compared to their peers. Under Armour, Inc. NYSE: UA, for example, has a P/E ratio of 10, while Skechers USA Inc NYSE: SKX is just 19. To be fair, the other side of the spectrum has the likes of Lululemon Athletica Inc NASDAQ: LULU commanding a P/E ratio of 65, but at least their earnings reports have been justifying it. 

It’s looking unlikely that Nike is going to catch any of the Santa Claus rally that has the S&P 500 index on the cusp of an all-time high, but perhaps this report could come to be looked back on as a key turning point in the company’s own drive for highs. Let’s watch to see where shares close out the year over the next week and if there’s a bounce back on the cards in January.