Nike's fiscal first-quarter sales are anticipated to experience a significant decline, projected to be in the double digits percentage wise. This prediction comes amid challenging fundamentals that have led analysts to reduce their full-year outlook for the brand. According to Morgan Stanley, the athletic footwear and apparel manufacturer is set to announce its first-quarter results this upcoming Tuesday.
The brokerage anticipates that the results will align with Wall Street projections, forecasting earnings of approximately $0.50 per share and a year-over-year sales decline of 10%. The brokerage has expressed concerns over ongoing negative EPS revision risks in the upcoming 12 months, particularly with the recent several months showing worsening factors and the potential for management to set a low bar for the incoming CEO.
Morgan Stanley highlights that even if Nike's outcomes exceed expectations, they would still likely reflect the company's challenged fundamentals. In a surprising announcement last week, Nike disclosed that its CEO, John Donahoe, will retire next month. The company will see the return of former executive Elliott Hill to take the reins once again.
Morgan Stanley has taken a cautious stance on Nike's North America sales for the first quarter, projecting a decline of 13% from the previous year, which is slightly more severe than the broader market's consensus of a 12% drop. In contrast, they are exhibiting more optimism towards Nike’s performance in Greater China, suggesting sales there will be 'closer to' flat as opposed to the Street's expectations of a 4% decline.
As for the ongoing quarter, Morgan Stanley suggests that Nike should establish an EPS outlook that aligns with the Street's estimate of $0.82. Back in June, Nike had anticipated a mid-single-digit percentage drop in revenue for fiscal 2025. Currently, the brand’s outlook implies an annual EPS of approximately $3, though there's speculation from some market analysts that numbers as low as $2.60 could materialize as possible outcomes.
The brokerage is eyeing an EPS of $2.77, alongside a sales decrease projected at 7%, contrasted with the Street's expectations of $3.09 and a 5% decline, respectively. Morgan Stanley commented that, while the guidance assumptions for Nike’s first half of the fiscal year might prove reasonable, the anticipated improvements for the second half of the year seem overly optimistic.
They also forewarn of an outlook reduction expected in the coming week. In light of these insights, the brokerage increased its price target for Nike shares to $82 from $79, while maintaining an equal-weight rating on the stock. Recently, Nike shares saw a slight increase of 0.5% during Wednesday afternoon trading, albeit having decreased 19% year-to-date.
Morgan Stanley concluded the analysis by stating, 'We don't think the negative EPS revision cycle is behind Nike, and that any rate-of-change story is a ways off.'.