Nike, the renowned athletic footwear and apparel manufacturer, is anticipated to report a fiscal second-quarter earnings surpassing market expectations. However, its guidance for the third quarter appears to be below Wall Street anticipations due to potential downsides in sales and gross margin, as noted by Morgan Stanley in a recent communication.
Scheduled to unveil second-quarter results this Thursday, Morgan Stanley predicts earnings will reach $0.67 per share, slightly exceeding the consensus estimate of $0.65. This positive projection is attributed primarily to effective discipline in managing selling, general, and administrative expenses. However, the brokerage foresees a sales decline of 10% year over year, contrasting with Wall Street's estimate of a 9% decline and Nike's own range, which suggests an 8% to 10% drop.
Most company data points during this period were described as "incrementally negative," which contributed to Morgan Stanley's cautious stance on sales. Looking ahead, Morgan Stanley expects Nike to guide third-quarter earnings per share between $0.55 and $0.60. It also anticipates a high-single-digit to low-double-digit percentage drop in sales, which would lag behind the Street's projections of $0.65 EPS and a 7% sales decline.
The brokerage points towards ongoing challenges such as "inventory digestion" and pressures from sales promotions that are expected to affect performance in the near term. Further reflecting its cautious outlook, Morgan Stanley revised its price target on Nike's stock to $80 from the previous $82 while maintaining an equal-weight rating.
As of late Friday afternoon trading, Nike's shares were down 0.8%, marking a significant decline of 29% in value year-to-date. In September, it was announced that Elliott Hill would assume the role of CEO at Nike. Subsequently, in October, the company retracted its full-year guidance due to the transition in leadership.
Morgan Stanley posits that the outlook is unlikely to be reinstated given Hill's brief tenure thus far and the lack of clarity regarding the company's strategic direction. Additionally, the brokerage expressed skepticism over the assumption that Nike's fundamentals could "meaningfully improve" in the latter half of the fiscal year.
Adjusting its full-year EPS outlook, Morgan Stanley lowered expectations to $2.45 from a previous estimate of $2.60, projecting a sales decrease of 9%, compared to the earlier estimate of an 8% decline. In summary, while Nike's long-term strategy is considered promising and the new CEO offers a fresh perspective, there is insufficient evidence suggesting an imminent turnaround in fundamentals, leading to a cautious outlook on the stock's performance.
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