Nike (NYSE:) reported their fiscal Q2 ’25 monetary outcomes final Thursday night time, December nineteenth, ’24, and regardless of the powerful steerage for the final two quarters of fiscal ’25, primarily as a consequence of stock re-alignment, the most effective signal for the inventory was that regardless of the tempered outlook, and anticipated margin compression, the inventory completed virtually unchanged in buying and selling Friday, December twentieth, on almost 3x common day by day quantity, (33 million shares traded versus the 12 million common).
If readers would have a look at how Micron (NASDAQ:) traded after Wednesday night time’s fiscal Q1 ’25 earnings launch, and the way FedEx (NYSE:) traded Friday, December twentieth, shares that don’t go down on dangerous information, are as telling as shares that drop sharply after a terrific quarterly report.
A lot of buying and selling and even the longer sport of true investing relies on “expectations” round sentiment, round earnings, round administration, and even round steerage, and many others.
Nike peaked at $180 per share in November ’21 and continues to be properly beneath the 50% decline mark, and simply could also be getting totally washed out, by way of unanticipated dangerous information.
Right here’s a fast re-hash of Nike Q2 ’25 monetary metrics:
Income beat the estimate by 2% for the quarter, whereas EPS beat it’s consensus estimate by 24% (and working revenue beat by 57%), as income fell 9% y-o-y (fixed foreign money based mostly), working revenue fell 24% y-o-y and EPS additionally fell 24%;
Gross and working margins fell 100 bp’s and 240 bp’s y-o-y respectively in Q2 ’25, a lot of this Elliott Hill (new Nike CEO) famous would proceed to strain margins till This fall ’25 or the Might ’25 quarter finish;
As a result of Nike doesn’t publish a cash-flow assertion with earnings, though the remainder of the world’s nice manufacturers do, i.e. Coca-Cola (NYSE:), Apple (NASDAQ:), Nvidia (NASDAQ:), Tesla (NASDAQ:), and many others. it appears like Nike generated $500 million in free-cash-flow for fiscal Q2 ’25, up barely from final quarter’s $274 million, and undoubtedly pressured by the stock liquidation;
Observe this: Nike’s working revenue has fallen y-o-y for 10 of the final 13 quarters.
Evaluating margin metrics when Nike was buying and selling at $180 per share in late ’21, versus right this moment’s margin metrics with the inventory at $80 per share, the place’s what’s occur to gross and working margins since:
Gross margin: late ’21 common about 46.5%, versus right this moment’s 43.6%;
Working margin: Late ’21 common of about 15% versus right this moment’s 11.20%;
Value to cash-flow and free-cash-flow valuation in late ’21 of 38x and 40x versus right this moment’s P/CF and P/FCF valuation of 18x and 22x;
Value-to-sales valuation right this moment of 1.86x versus the late ’21 valuation of 4.86x
Right here’s the actual downside although:
Nike EPS estimate revisions:
Supply: LSEG
Must be frank with readers and say proper upfront these are brutally ugly downward revisions to Nike EPS estimates for fiscal ’25, ’26 and ’27.
Doing the fast math, that’s a 25% one-time damaging revision for fiscal ’25, a damaging 24% revision for fiscal ’26, and a 15% damaging revision for fiscal ’27.
That’s grim.
Nike income estimate revisions:
Simply since 12/15/24, the fiscal ’25 income estimate has been revised decrease by -3%, the fiscal ’26 estimate by -5%, and shockingly, the fiscal ’27 estimate by -6%.
Personally, I didn’t anticipate to see that for the reason that essential Nike downside right this moment continues to be stock, and – properly – extra stock, and also you’d anticipate administration to have the ability to chew the bullet, take the margin and cash-flow hit and get the previous product out the door.
These damaging estimate revisions smack of analyst fear about longer-term shopper demand and the shortage of innovation in regards to the Nike product line.
Conclusion
The value motion in Nike’s inventory final Friday, December twentieth, ’24, regardless of the income and margin steerage was really encouraging, however I wasn’t ready for the diploma of downward revision to Nike EPS and income estimates for the remainder of fiscal ’25 in addition to fiscal ’26 and financial ’27.
Fiscal ’25 with two quarters remaining within the fiscal 12 months how expects a 48% decline in EPS (for the complete 12 months) on an 8% income drop y-o-y.
This weblog has modeled Nike EPS and income development since 1992, and within the 33 years between fiscal ’92 and financial ’24, Nike has solely seen 4 years of damaging income development y-o-y, and that was 1994 (-4%), 1999 (-8%, brown shoe craze was the rationale), 2010 (-1%, assuming as a consequence of international slowdown put up 2008), 2020 (-4% Covid pushed).
The stock liquidation will impression earnings, income and cash-flow for the remainder of fiscal ’25 (ends Might 31), that a lot was clear from Elliott Hill, Matt Buddy (CFO) and the remainder of the Nike group. Beneath all this stock liquidation, Elliott wants to revive “Nike vitality” to the model and be modern and create buzz across the fiscal 2026 product line, and judging by the tenor of the convention name notes, I assumed Elliott Hill – like every good CEO – was hesitant to “overpromise” on that entrance.
The inventory is down 60% from its November ’21 all-time-high close to $180 – $181. This correction is just like the late 1990’s “brown shoe craze” (sorry in regards to the title however that’s what it was known as on the time, as shopper shoe preferences shifted away from the Nike model in the direction of what have been then mountain mountain climbing boots and extra non-athletic footwear).
Nike’s inventory was below water from the late 1990’s by means of 2003 when quite a lot of points internally have been fastened, just like the supply-chain, like an growth of the Nike footwear model, and many others.
Technically, I’d want the inventory to stay above the July ’24 close to $70 – $71 and NOT commerce by means of $70 on heavy quantity. One technician that this weblog follows thinks $60 is the last word technical help for Nike.
This weblog has it’s largest place in Nike within the final 15 years the final 12 months because of the rather more cheap valuation. It’s nonetheless not “completely” however on a 25-year relative valuation measure, the inventory sports activities a 4% free-cash-flow yield and a 2% dividend yield, for the primary time in years. Shoppers have price foundation positions between the $70’s and the $125’ish vary.
Morningstar places a “honest worth” on Nike round $115 per share, that means the inventory is considered undervalued by 33% as of Monday, December 23rds’ open.
Traders can anticipate the following two quarters to stay grim, because of stock liquidation a nonetheless weak China. China income has fallen -4% and -8% the final two quarters, whereas China EBIT has fallen -4% and -27% the final two quarters. (China income is roughly 14% of Nike whole, whereas China EBIT is 28% of Nike’s whole EBIT within the final quarter.)
Some tax-loss promoting could also be achieved earlier than year-end ’24 in taxable accounts, and a few small allocations of Nike could be purchased for these accounts with the most important loss simply to cut back price foundation over time.
There isn’t a query the inventory value response to an unsightly quarter is a constructive. As previous merchants and portfolio managers say incessantly, “value (motion) is every little thing.”
Immediately, Nike will stay a longer-term place, for shoppers, however that might change shortly.
Disclaimer: None of that is recommendation or a advice, however solely an opinion. Efficiency isn’t any assure of future outcomes. This data might or is probably not up to date, and if up to date is probably not achieved in a well timed vogue. Investing can and does contain the lack of principal, even for brief durations of time. Nike income and EPS estimates are sourced from LSEG.
