Nike (NKE) Inventory Reduction With New Strategy Might Help Earnings

Nike's (NKE) stock is expected to rebound over time as signs emerge that the sportswear giant's turnaround efforts under a new chief executive are materializing. Nike shares have been down about 5% since it announced in September the return of former longtime executive Elliott Hill as CEO,

As a result, Nike withdrew its full-year guidance in October and postponed its investor day.Nike is expected to post earnings per share of $2.50 and $2.80 for fiscal 2025 and 2026, respectively, compared with its prior projections of $2.75 and $3.10.

The earnings per share for the fiscal Q2 2025 is expected to come in at $0.64.

NKE last reported earnings on 01 October 2024 after the market close (AMC). NKE shares declined -6.8% the day following the earnings announcement to close at 82.68. Following its earnings release, 78 days ago, NKE stock has drifted -5.7% lower.

From the time it announced earnings, NKE traded in a range between 72.34 and 84.33. The last price (78.00) is closer to the lower end of range.

Nike has four divisions around the world that cater to their different geographical markets. The main operations are in North America, and there is also the EMEA which consists of Europe, the Middle East and Africa, Greater China, and finally, Asia Pacific and Latin America.

Nike’s only revenue-generating activity is the sales of its extensive range of products. Footwear sales account for the majority of sales, which exceeded $29 billion in 2024. This is followed by apparel sales of $13.5 billion. Equipment sales generated a revenue of more than $2.35 billion, while more than $1.6 billion came from sales of the Converse brand.

Emerging Markets Hold a Significant Portion of Nike’s Revenue – Emerging markets contributed to nearly 12% of Nike’s total revenues in fiscal 2017. In fiscal 2023, Nike’s footwear revenue in the Asia Pacific and Latin America regions amounted to approximately 4.54 billion U.S. dollars. The company’s growth in China and India, along with a resurgence in regions like Latin America, indicate that emerging markets will continue to be a major contributor to Nike’s future success.

Footwear Revenues Account for 68% of Total Revenues – Nike’s footwear segment has consistently been the company’s main revenue generator, accounting for an increasing percentage of total revenues over the years.

The Nike brand is centered on athletic products, primarily footwear, as we can clearly see in the Nike business model canvas. But Nike does not simply provide shoes to athletes. Rather, they send the message that anyone can be an athlete with the help of the superior quality and innovative products that Nike has to offer.

For years, Nike has been successfully offering and delivering value to their target market. In addition to using only the finest raw materials and the highest level of craftsmanship and technology, they have also partnered with popular sports personalities to further elevate their brand.

Nike’s remarkable success can be attributed to its products’ broad appeal. The company targets not only professional athletes but also a wide-ranging audience seeking their products for various purposes, including casual wear, not just sports.

Nike has forged partnerships with several other companies to ensure the smooth and continuous flow of operations. A large percentage of these partnerships have to do with manufacturing, since Nike does not have their own facilities but instead, outsources the work to contractors. To date, there are over 145 factories making their footwear and over 400 factories producing their clothing. Most of these partner manufacturers are outside the US.

Moreover, Nike engages in collaborations with esteemed research partners, such as prominent universities in the US, Europe, and Asia, to ensure the development of premium products. Rigorous research efforts are undertaken to elevate the planning, design, and development phases.

Considering the large volume of products that the company keeps in stock, it is no surprise that most of its expenses go into warehousing and inventory, as we can see in the Nike business model canvas above. This alone accounts for about $21 billion of the company’s expenses per year. This is followed by marketing and administrative expenses which total $3 billion. Administrative expenses take up about $500 million annually.

if we looked at Nike fiscal Q1 FY25 results for period ending August 2024, we saw that there is a $50M miss on revenue which is down 10% Y/Y to $12.6B. But the GAAP EPS beat estimate by $0.18 to come in at $0.70.

There is a 5% decrease in inventory year-on-year to $8.3B, wholesales also dropped by 8% to $6.4B, same for direct sales where we saw a 13% decrease year-on-year to $4.7B.

So if we were to look at how Nike might be affected by its performance in China due to macro headwinds and competitive pressures in the Asian country. Nike highlighted weaker traffic, persistently high promotional levels and elevated inventories in the region on its fiscal first-quarter earnings call.

This would mean that the operating expenses could be higher due to the warehousing and inventory,

NIke investors are down more than 25% year-to-date and Nike are facing headwinds but investors are generally optimistic about opportunities to turn around the company over the long term, but remain negative over the short term.

The sentiment indicating the hop that the new team could help to turn things around at least in fiscal 2026 could mean there is a chance that we could see Nike shares creating new highs.

The implied volatility skew shows the market's bias for pricing in volatility risk to the option premium of downside puts and upside calls.

The implied volatility for upside calls is increasing relative to downside puts, this suggests the market is pricing in for an upside move.

The current skew indicator is showing very bullish signal.

Nike is currently trading in a bearish signal, the shares is just above the short-term MA and long-term MA is above the short-term MA, though MACD is forming a potential bullish crossover.

But MTF is not giving us a positive signal, more towards a negative downside. Hence, I think we need to exercise caution to look at how Nike would be trading on the 19 Dec before its earnings.

What I would be looking for is whether Nike could come up with a revamped wholesale strategy, this should allow it to over the current challenges as retailers are keen to grow with the company's new leadership after missing assortments over the past few years,

In order to reduce the inventory levels, we might see Nike accelerating 2024 holiday season promotional activity.

So with these anticipation I would like to take a position but will watch the price action for Nike closely on 19 Dec.

Appreciate if you could share your thoughts in the comment section whether you think Nike could turn things around with inventory reduction and also a new revamped sales strategy under its new CEO?

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.