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Konik’s downgrade comes ahead of Nike’s fiscal first-quarter earnings report, scheduled for Thursday. Analysts on average expect the company to report a profit of 76 cents per share on revenue of $13.02 billion, according to FactSet data. So far this year, Nike’s stock has struggled, losing more than 22%, making it the second worst-performing Dow Jones Industrial Average member.
Jefferies’ consumer survey results indicate that US consumers are likely to reduce spending ahead, with apparel and footwear being the most likely areas of pullback. The analyst lowered his revenue and earnings-per-share estimates for fiscal 2024 to $52.1 billion and $3.45, respectively, both lower than consensus.
While retail inventory levels have improved industry-wide, Jefferies anticipates tight inventory management through at least the end of 2023 is likely to reduce orders and weigh on Nike’s wholesale channel. The retailer’s ongoing focus on increasing direct-to-consumer sales penetration is expected to expand margins over time, but a pressured consumer environment could slow the rate of this expansion.
Furthermore, Jefferies anticipates Nike’s growth in China could be “choppy” given the recent slowdown in apparel retail sales in the country. The firm expects 7% growth in fiscal year 2024 compared to the 12% consensus estimate.
Jefferies also highlighted a slowdown in U.S. consumer spending that could lead to further headwinds for Nike. The firm’s recent consumer survey indicated U.S. consumers with student debt are concerned about meeting their monthly expenses, and that apparel and footwear are likely to be areas of reduced spending moving forward. A significant number of survey respondents plan to buy cheaper alternatives in apparel and footwear, suggesting Nike could face incremental headwinds in higher-priced areas of its assortment.
UBS analysts also noted a similar trend of cautious consumer spending, predicting a broad-based slowdown across all demographic groups. These findings align with concerns voiced by retailers over the reemergence of student loan payments, which Jefferies believes could be a “key pain point” for consumer stocks through the end of 2023.
Jefferies’ research found more than half of respondents plan to spend less on apparel and accessories, while restaurants and footwear were the second and third most frequently listed categories where consumers plan to spend less. This could pose meaningful headwinds to growth in these categories, particularly in the second half of 2023.
The firm downgraded Foot Locker (NYSE:FL), Urban Outfitters (NASDAQ:URBN), and Nike all to Hold from Buy and slashed the price target on each. The return of student loan repayments could further weigh on already soft sales at some specialty apparel coverage, Jefferies analyst Corey Tarlowe noted.
The company’s direct-to-consumer business could also be at risk as 39% of respondents said they plan to buy cheaper alternatives in apparel and accessories and 35% said the same for footwear. “We believe these results suggest that NKE could face incremental headwinds in higher-priced areas of its assortment,” Konik wrote in a note.
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