Q3 Sales Miss for Wide-Moat Nike; Shares Expensive

Affected by both the pandemic and shipping issues, wide-moat Nike’s NKE 3% sales growth in the third quarter of fiscal 2021 fell short of our 9% forecast. However, its profitability shined, with gross and operating margins of 45.6% and 16.2%, respectively, surpassing our 44.5% and 13.2% estimates. Although inventory shortages impacted sales, we see them as temporary and not reflective of high underlying demand. This stance is reflected in Nike’s guidance of 75% sales growth (against an easy comparison due to the outbreak last year) for the fourth quarter versus our prior 66% estimate. Thus, we expect to lift our per share fair value estimate on Nike of $113 by a mid-single-digit percentage but view its shares (which have roughly doubled over the past year) as overvalued.

In the third quarter, Nike’s sales fell short of our estimates in all regions except greater China (23% of Nike brand sales), where its 51.3% (42% currency-neutral) sales growth eclipsed our 29.0% estimate. The power of its brands has allowed it to capture about 25% of the Chinese sportswear market, and we expect it will continue to gain share. Meanwhile, Nike’s North America sales (36% of total) were hurt by a shortage of shipping containers and congestion at West Coast ports, problems reported by other international apparel manufacturers. Its sales in the region fell 10.4%, well below our forecast of 3.5% growth, but its segment operating margin of 27.2% was above our 26.0% estimate as owned e-commerce (more profitable than wholesale) surged more than 50%. Further, Nike’s sales in Europe, the Middle East, and Africa (27% of total) declined 3.7%, missing our estimate of 10.5% growth, on virus-related store closures and restrictions. While about 35% of its EMEA stores are still closed, the company expects normal operations to resume in about a month.

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