Nike
stock was dropping after the company beat expectations for second-quarter earnings and announced a $2 billion cost-cutting plan, as it sees sales softening for the second half of its fiscal year.
Profit jumped 21%, to $1.03 a share, while revenue edged up 1%, to $13.4 billion. Analysts tracked by FactSet expected profit of 84 cents a share on revenue of $13.4 billion.
Nike said it is identifying opportunities to find $2 billion in cumulative cost savings in the next three years, including simplifying its product assortment, increasing the use of automation and technology, streamlining its organization, and using scale to drive greater efficiency.
The plan will result in pretax restructuring charges of $400 million to $450 million, to be recognized in the third quarter of fiscal 2024. The charges relate to employee severance costs.
CEO John Donahoe said the company is “embracing a companywide journey to invest in our areas of greatest potential, increase the pace of our innovation, and accelerate our agility and responsiveness.”
CFO Matthew Friend said the company remains focused on executing on its gross margin and disciplined cost management “as we look ahead to a softer second-half revenue outlook.”
On a conference call, Friend said Nike is seeing indications of more cautious consumer behavior around the world. He said third quarter reported revenue is expected to be slightly negative and fourth quarter revenue should be up low single-digits, reflecting “increased macro headwinds,” especially in China and its operations in Europe, the Middle East, and Africa.
Shares of Nike fell 12% in premarket trading. They were up 4.7% so far this year through Thursday’s close.
Over the past few months, Street sentiment on Nike stock has been improving. Investors have rallied behind the prospect of bigger margins now that the company is seeing better freight costs and less discounting.
Just last week, Citi analyst Paul Lejuez upgraded shares of Nike to Buy from Neutral, arguing that Nike is an “attractive margin recovery story” amid a choppy macroeconomic environment. And earlier in December, Wells Fargo analyst Ike Boruchow added Nike to his top picks list, swapping out competitor
Lululemon Athletica
in the process.
“We simply believe the recovery characteristics and self-help story now beginning at [Nike] make for a more compelling long idea into 2024,” Boruchow wrote at the time.
Some analysts still see bumps in the road ahead.
“It’s also important to keep in mind that NKE isn’t yet firing on all cylinders,” wrote Wedbush analyst Tom Nikic in a note to clients.
Nikic says the company’s inventory levels are still high, leading to more discounts over Black Friday week. Meanwhile, wholesale demand for footwear in North America and Europe has been slowing, which could affect Nike’s revenue in the latest quarterly results.
Nike said second quarter 2024 inventory was down 14% from a year ago, to $8 billion. Gross margin rose to 44.6%, driven by strategic pricing and lower ocean freight costs.
Revenue from North America dipped 4% in the quarter, to $5.6 billion, but rose 4% in greater China, to $1.8 billion, from one year ago.
The macroeconomic challenges will also likely prevent Nike’s management team from raising guidance, Nikic wrote. He says he wouldn’t be surprised if the stock gives back some of the gains it has made in recent weeks.
Earnings, however, might be a bright spot in the report, as Nike starts to lap some of the benefits of lower freight costs that are expected to help the company out in 2024.
“Top-line challenges remain, but we are more optimistic about NKE’s ability to protect EPS in F24/F25 despite a choppy macro,” Citi’s Lejuez wrote.
Write to Sabrina Escobar at [email protected]
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