Nike (NKE) Q2 2023 Earnings: What to Expect

Is now the best time to chase Nike (NKE) stock? With the shares down 40% year to date and 35% over the past twelve moths, it’s hard to argue that Nike might be the most undervalued name in retail apparel.

The global apparel and footwear giant can remove all doubt when it reports second quarter fiscal 2023 earnings results after the closing bell Tuesday. The company’s year-to-date stock performance doesn’t reflect the strong operating trends within its Direct-to-Consumer (DTC) business, nor that segment’s long-term potential. The DTC segment continues to gain momentum; it is not only more profitable than wholesale, it also gives the company more pricing power while also allowing it to affect the consumer buying experience.

In fiscal 2022, the DTC business generated $18.7 billion, rising 14% year over year, thanks to increases in digital sales. As it stands, DTC now accounts for 43% of the company’s total revenue, compared to 27.5% six years ago. This suggests that the decline in Nike’s stock does not reflect the operational excellence the company has displayed over the past several years. That discount may soon end, according to Citigroup analyst Paul Lejuez.

The investment firm recently placed Nike on a 30-day Positive Catalyst Watch, calling for a near-term rally after earnings, citing recent sales and margin momentum. Lejuez believe that consumers continue to respond well to Nike’s promotions, saying that prior issues with excess inventory has gotten better, and that the company has also seen improvements in China which has relaxed some of its COVID restrictions.

For the quarter that ended November, Wall Street expects the Oregon-based apparel company to earn 65 cents per share on revenue of $12.56 billion. This compares to the year-ago quarter when earnings came to 83 cents per share on revenue of $11.36 billion. For the full year, ending May, earnings are expected to be $3.00 per share, down from $3.75 a year ago, while full-year revenue of $49.01 billion would rise 4.9% year over year.

During the market selloff, along with rising inflation, Nike’s brand strength has been one of the company’s strongest assets, serving as a defense during periods of weak economic growth. The expected decline in profits for the just-ended quarter reflects tough year-over-year comparisons the company is working through. The company has also experienced some gross margins weakness which in Q1 came in at 44.3%, down from the year-ago mark of 46.5%.

Part of the gross margin pressure has been due to the company’s increased promotions in an effort to move inventory. However, management also highlighted that it will enter fewer promotional activities in the coming quarters, which suggests that the just-ended quarter is likely the bottom of the its margin pressure and the company could revert back to higher margin levels heading into fiscal 2024, and consistent with its gross margins guidance of 43.8%.

Meanwhile, the company’s investments in the DTC will be the key to profit margins expansion, which has driven a top and bottom line beat in the previous two quarters. In the first quarter, the company delivered adjusted EPS of 93 cents on revenue of the $12.69 billion, topping estimates by 1 cent and $410 million, respectively. The DTC segment revenue came to $5.1 billion, up 8% year over year, beating estimates of $4.92 billion.

Just as impressive, Nike Brand Digital revenue rose 16% year over year, driven by 46% percent international growth. On Tuesday for the stock to reverse course, Nike must produce another beat and issue strong guidance for the holiday quarter and full year.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.