Nike's Rating Downgraded by TD Cowen Analyst Amid Concerns About Competition

TD Cowen's John Kernan downgraded their rating on Nike (NYSE: NKE) from Buy to Hold on 2023/12/22. The analyst also lowered their price target by 19.4% from $129 to $104.

In a report summing up Nike's Q2 2024 earnings, Kernan expressed concerns about the company's performance and competition. Kernan stated, "the results were a sign that the Street's profit estimates were too high for Adidas [traded on the DAX] and other competitors like Vans and Under Armour."

Looking ahead, management at Nike highlighted their focus on "newness and innovation" to attract hesitant shoppers. They emphasized that despite the prevalence of promotional pricing on shoes, interest in their sneakers priced over $100 remains strong. Additionally, Nike sees potential for profit growth through expanding its Jordan brand beyond basketball and shoes.

However, Kernan remained unconvinced, stating that Nike needs to improve its marketing efforts beyond basketball, streetwear, and lifestyle trends. Kernan argued that "innovation at the higher end of its assortment is not resonating at scale" while facing disruption from smaller competitors in the footwear and apparel market. The analyst further warned that moving the Jordan brand into lower price points and away from a scarcity model could jeopardize the fastest-growing segment of Nike's business.

For Q2 2024, Nike reported earnings per share (EPS) of $1.03, surpassing the Zacks Consensus Estimate of $0.84 by 21.2%. Revenue for the quarter amounted to $13.388 billion, slightly missing the Zacks Consensus Estimate of $13.395 billion but showing a 0.05% increase compared to Q2 2023. Gross profit reached $5.971 billion, marking a 5% year-over-year growth, with a gross margin of 44.6%, up 170 basis points.

Looking ahead, Nike provided guidance for Q3 and Q4 2024. For Q3, the company expects slightly lower revenue growth compared to Q3 2023's double-digit growth, along with a gross margin expansion of 160 to 180 basis points. In Q4, Nike anticipates revenue growth in the low-single digits and a gross margin expansion of 225 to 250 basis points. For the full fiscal year 2024, Nike projects revenue growth of 1%, down from the previously guided mid-single digits, and a gross margin expansion of 140 to 160 basis points. The company also disclosed restructuring charges of $400 million to $450 million for the second half of 2024, with a significant portion recognized in Q3.

Nike's President and CEO, John Donahoe, expressed satisfaction with the Q2 results, highlighting the company's focus on innovation, storytelling, and differentiated marketplace experiences. CFO Matthew Friend emphasized that the Q2 financial performance was a turning point in driving more profitable growth. Friend stated, "As we look ahead to a softer 2H revenue outlook, we remain focused on strong gross margin execution and disciplined cost management."

Following Kernan's rating downgrade, other analysts also adjusted their outlook on Nike. Piper Sandler's Abbie Zvejnieks lowered their price target by 4.5% to $107 and maintained a Hold rating on the stock. Beth Reed from Truist Securities lowered their price target by 0.9% to $107, also maintaining a Hold rating. JP Morgan's Matthew Korn lowered their price target by 7.9% to $128 but maintained a Strong Buy rating on Nike's stock.

Currently, 82.4% of top-rated analysts rate Nike as a Strong Buy or Buy, while 17.6% consider it a Hold. No analysts recommend selling the stock.

The consensus forecast among analysts predicts that Nike will deliver earnings per share (EPS) of $3.8 in the upcoming year. If the analysts' predictions hold true, Nike's next yearly EPS will increase by 16% compared to the previous year.

Since Nike's latest quarterly report on December 21, 2023, the stock price has declined by 11.8%. Year-over-year, the stock is down by 7.4%. During the same period, Nike has underperformed the S&P 500, which has experienced a decline of 24.4%.

TD Cowen analyst John Kernan holds a strong reputation, ranking in the top 10% of Wall Street analysts according to WallStreetZen. With an average return of 10.1% and a win rate of 62.7%, Kernan specializes in the Consumer Cyclical sector.

Nike, Inc., founded in 1964 and headquartered in Beaverton, OR, is a global leader in athletic footwear, apparel, equipment, and accessories. The company operates in the United States and internationally, offering products for adults and children alike.

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