Wide-Moat Nike Staged a Strong Comeback in Q1

Wide-moat Nike NKE sped past our sales and earnings estimates in its August-ending fiscal 2021 first quarter, as its direct-to-consumer efforts overcame pandemic-related disruptions. Quarterly sales fell just 1% from last year’s result, much better than our forecast of an 18% drop. While impressive, the report was not entirely surprising as a few firms that sell its gear, including Foot Locker and no-moat Dick’s Sporting Goods, had previously announced stellar results for the summer months. For the full year, Nike guided to flat margins and sales growth in the high-single to low-double digits. These margin expectations align with our prior estimates, but we had forecast sales growth of just 4% for the year. Of benefit to Nike, we think there has been a big shift toward casual dress and activewear as many people have been working and exercising at home during the pandemic. However, we caution that the federal stimulus program and pent-up demand from the store closures in the spring likely provided a short-term boost. We expect to increase our per share fair value estimate of $100 on Nike by a mid-single-digit percentage but view shares, which jumped about 13% in post-market trading to a fresh all-time high, as expensive.

Nike’s direct sales rose 12% in the quarter and helped to offset sluggish wholesale orders and sales. While nearly all its stores and those of its wholesale partners worldwide have reopened, customer traffic has been below normal and there has been discounting. Nike’s gross margin of 44.8% in the quarter represented a year-over-year drop of 90 basis points but was 280 basis points better than our forecast due to the sales shift away from wholesale. Further, its operating expenses declined 11%, slightly better than our forecast of a 10% drop, on marketing cuts related to the shutdown of most sports. Overall, its operating margin of 16.7% was nine percentage points better than we expected and an increase of 220 basis points over last year.

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