Is Nike a buy after a difficult quarter?

It’s time to explore an American icon. Here is the break down of $NKE, otherwise known as Nike.

Current Price: $145.38

52/Wk High: $174.38

52/Wk Low: $118.80

Market Cap: $230.2 Billion

3 Month Performance: -7.91%

Dividend: $0.275 / Quarter

Read below for the break down!

Nike ( $NKE ) is a leading designer, distributor, and marketer of athletic apparel, equipment, footwear, and accessories. The company’s core focus is fitness and sports, of which the company’s brand is built upon and within.

Sifting through a brief history of Nike, the company was founded in 1964 in Oregon, of which the company is still headquartered. Since then, Nike has adopted new brands including Converse and Jordan, while expanding into new global regions including Europe, Africa, Asia, Latin America, and the Middle East.

Breaking down Nike’s stock price according to TREFIS (@trefis) data, 61.7% of the stock price is based on Nike’s Brand Footwear segment.

Furthermore, 29.7% is based on the Nike Brand Apparel segment, 3.6% Other Businesses, 3.4% Nike Brand Equipment, 0.2% Licensing, and 1.6% is based on cash and or net of debt.

Nike is led by CEO and President John Donahoe, who has been a key director since 2014. Donahoe joined management in 2020 and boasts prior experience from the likes of ServiceNow and eBay, both of which he served as CEO at, and led to further success.

The team behind Donahoe is reliable, providing the company with wisdom and prior experience from the likes of Disney, Levi Strauss, and more. It is important to note that a majority of leadership has been with Nike for years, composed of veterans who have built Nike into the company it is today.

In recent news, Nike has experienced major supply chain malfunctions throughout the COVID-19 pandemic that continue to hinder the company. In fact, in the most recent quarterly report, the company reported a continuation of a bottleneck in supply.

The company reported that it takes around 80 days to transfer products from Asia to North America, doubling transit times. Also reporting that pandemic shutdowns in Asia led to 10 weeks of lost production per CNBC.

Not only that, but Nike’s guidance on the key supply issues was not exciting, with management predicting continued supply issues for upcoming quarters. Given the supply constraints, demand is expected to outweigh supply for months to come.

On the strategy front, Nike continues to push hard for a direct-to-consumer model, cutting wholesale accounts and experts believe that supply chain issues could push forward Nike’s transition to a more digital approach.

“Digital is increasingly becoming a part of everyone’s shopping journey, and we are well positioned to reach our vision of a 40% owned digital business by fiscal 2025,” Chief Financial Officer Matt Friend said.

Digging into the numbers Nike beat Q1 2022 expectations with an EPS of $1.16, better than the analyst’s consensus estimate of $1.11. On a year-over-year basis, EPS expanded by 22.11%.

On the revenue front, Nike reported $12.2 billion in Q1 revenue, representing a solid 16% expansion in revenue when compared to Q1 2021. Do note, revenue totaled $10.594 billion in Q1 of 2021.

Sifting through revenue, below is a segment by segment break down with YoY growth metrics.

North America:

$4.879 Billion, Up 15%

Europe, Middle East, Africa:

$3.307 Billion, Up, 14%

Great China:

$1.982 Billion, Up 11%

Asia Pacific, Latin America:

$1.465 Billion, Up 33%

Converse:

$629 Million, Up 12%

Furthermore, when breaking down revenue by product, Nike experienced growth in each product segment.

Footwear:

$7.718 Billion, Up 14%

Apparel:

$3.450 Billion, Up 20%

Equipment:

$465 Million, Up 25%

Global Brands:

$7 Million, Up 75%

Rounding out revenues, Nike’s digital brand sales increased by a strong 29% when compared to Q1 of 2021, representing strong digital sales growth year-over-year.

Shifting into margins, Nike reported an improving gross margin, with Q1 2022 gross margin landing at 46.5%, gross margin increased by 170 basis points year-over-year. Leadership noted margins were pushed by the company’s Direct Business.

As for profits, Nike reported $5.696 billion in gross profit, representing a strong 20% increase in gross profit on a year-over-year basis. Do note, gross profit totaled $4.741 billion in Q1 of 2021.

Rotating into income, net income totaled $1.9 billion in Q1, representing a solid 23% improvement over the same time 2021 level of $1.518 billion.

Finally, Nike ended the quarter with $6.7 billion in inventories and $13.7 billion in cash and cash equivalents, representing a flat inventories level and improving cash level.

The company also noted that dividends increased by 13% year-over-year and that $742 million in share repurchases occurred throughout the quarter, representing 4.8 million shares.

Leadership was upbeat.

“Nike’s strong results this quarter are continuing proof of our deep consumer connections, unrelenting innovation pipeline, and a digital advantage that fuels our brand momentum,” CEO John Donahoe said.

Looking to the future Nike lowered its guidance for FY 2022, now expecting mid-single-digit sales growth, a much lower expectation than the previous double-digit growth expectation.

Shifting into the balance sheet the numbers are solid.

Total Debt: $9.430 Billion

Total Liabilities: $23.574 Billion

Total Assets: $37.917 Billion

Cash & Short Term Inv: $13.695 Billion

Exploring the balance sheet, Total Assets increased by 14% year-over-year, Total Liabilities widened by 14% year-over-year, and Cash & Cash Equivalents expanded by 32% year-over-year.

On a valuation basis, Nike does trade at a premium.

Price to Earnings: 38.79x

Forward Price to Earnings: 20.92x

Price to Sales: 5.34x

Price to Book: 18.07x

Price to Free Cash Flow: 109.60x

Price to Earnings Growth: 2.58x

Management has been effective.

Return on Equity: 51.62%

Return on Assets: 17.09%

Return on Invested Capital: 22.41%

Given the numbers the analysts are bullish with a mean price target of $185.14/share, representing a 27.32% upside.

The high price target is $213.00/share, representing a 46.48% gain, while the low price target is $160.00/share, representing a 10.03 % upside.

The big money is quite involved with 80.18% of Nike being owned by institutions. Top holders include The Vanguard Group, BlackRock Institutional Trust, and State Street Global Advisors.

On a technical basis, Nike has been experiencing downside. According to the six-month charts, the MACD is moving with significant downside momentum within a range of -3.48 down to -4.78.

The six-month charts are also indicating an RSI of 26.6 and CCI of -142.08, both of which are on the low end.

Exploring investor sentiment, the bears believe slowing China growth and supply chain issues are reasons to expect further downside.

On the flip side, the bulls believe Nike’s continuing direct-to-consumer shift, and short-term outlook on supply chain issues are reasons to stay bullish.

In short, Nike ( $NKE ) is a leading apparel brand that boasts consistent growth, a strong balance sheet, reliable management, a loyal customer base, and advancing business strategy to capture future digital growth.

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Disclaimer: This is not direct financial advice, simply an opinion based on independent research.