Can Nike Stock Sustain Its Growth Momentum?

Nike (NYSE:NKE) stock declined 2.94% on Tuesday and closed the trading day at $88.26. A drop in Nike’s share price contributed to the decline in the Dow Jones Industrial Average on May 12. The Down Jones declined 1.88% yesterday. At Tuesday’s closing price, the company’s market value was around $137.2 billion. Currently, Nike stock is trading at a 16.4% discount from the 52-week high of $105.62. The shares are trading at a premium of 47.1% from the 52-week low of $60.00.

Can Nike stock continue to gain in the near term?

As of May 12, Nike stock has fallen around 13% since the beginning of the year. The coronavirus outbreak has shut down sports events and the company’s retail stores. Meanwhile, the stock has recovered and gained over 22% since Nike reported impressive third-quarter earnings results on March 24. In comparison, Adidas and Under Armour (NYSE:UAA) have declined over 33% and 60%, respectively, so far this year.

Nike is in a recovery phase. The company is gradually shifting to a “normalization phase” in Greater China, Japan, and South Korea. The company’s digital sales have witnessed significant growth along with a spike in retail traffic due to increased demand. Nike CEO John Donahoe said in the conference call that “we are seeing accelerating strong double-digit approaching triple-digit growth in our NIKE Digital business.” Nike’s focus on digital sales, its strong supply chain, sourcing capabilities, and its retail strategy should drive its performance in the coming quarters.

Wall Street analysts expect Nike to report sales of $8.0 billion in the fourth quarter. The figure would mark a decline of 21.3% YoY. Currently, analysts expect a decline of 0.82% in the May-ending fiscal 2020. However, analysts expect the company’s revenues to improve and grow by 7.6% YoY in fiscal 2021. Also, analysts expect Nike to report an adjusted EPS of $0.17 in the fourth quarter—a decline of 72.9% YoY. Analysts expect an adjusted EPS of $2.18 and $2.70 in fiscal 2020 and fiscal 2021, respectively. While analysts expect the earnings to decline by 12.3% in fiscal 2020, they expect the earnings to improve and grow by 23.8% YoY in fiscal 2021.

Solid financial results

Nike delivered a strong performance in the third quarter of fiscal 2020. The company reported revenues of $10.1 billion in the quarter, which beat analysts’ estimate of $9.80 billion despite the COVID-19 crisis. Nike’s revenues also rose 5.1% YoY (year-over-year) and 7% on a currency-neutral basis. The company’s revenues benefited from the digital business and strong growth in North America but suffered from lower sales in China.

In the quarter ending February 29, Nike’s reported earnings fell 22.1% YoY. The coronavirus dented the company’s China operations. However, on an adjusted basis, Nike’s EPS was $0.78, which beat Wall Street’s numbers of $0.59 per share. The company’s gross margins also contracted by 80 basis points to 44.3% in the third quarter. Notably, the company had to incur higher costs to manage its inventory, which dented the gross margins. In addition, higher tariffs in North America and higher-margin generation from the Greater China region also hurt the company’s gross margin. Nike had to temporarily close roughly 75% of its branded stores in the Greater China region in February to curb the spread of COVID-19, which hurt its margins. However, the company should benefit from a surge in retail traffic after the COVID-19 dust settles.

Analysts’ recommendations and technical details

Among the 34 analysts covering Nike stock, 27 recommend a “buy,” five recommend a “hold,” and two recommend a “sell.” Analysts have an average target price of $94.08 on Nike. The target price implies a return of 6.59% based on the closing price of $88.26 on Tuesday.

Nike’s 14-day RSI (relative strength index) score is 52.79. The RSI suggests that the stock isn’t “oversold” or “overbought.” The stock closed near its middle Bollinger Band level of $87.87, which suggests that it isn’t overbought or oversold.