Canaccord Gets Cautious on Nike (NKE); Lowers PT to $51
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Canaccord Genuity is lowering its price target on Hold-rated Nike (NYSE: NKE) from $52 to $51 today, noting the emergence of cautionary signs.
Analyst Camilo Lyon commented,
Over the past couple of days there have been a few NKE data points that incrementally cause us concern about the company's foreseeable three- to four-quarter sales trajectory, both from company filings and supplier results. In short, rising global inventories, slowing NA demand, and weakening supplier results further our cautious stance.
The analyst elaborated:
- First, in its 10-Q, NKE detailed its regional inventory in which all regions except NA appear to have excesses. WE is of significant concern as the inventory build there grew to 40% vs. reported sales of just 7%. This could be the direct result of adidas' strengthening momentum. China, despite a sequential improvement, still has elevated inventory (+29%) relative to sales growth (+15%).
- Second, NA DTC growth of 15% last quarter benefited from a higher level of factory outlet sales as noted in the company's gross margin disclosure that stated higher levels of off-price sales hurt GMs by 30bps.
- Third, by our math cancellations subsided to 1% in 1Q (from 5% in 4Q, 7% in 3Q and 12% in 2Q last year) which we believe had been a key factor in the dislocation between futures and revenue growth (as were internal DTC growth expectations).
- Fourth, Feng Tay a Chinese footwear OEM whose business is 80-85% NKE driven, reported a sharp decline in its September sales (-12.6%). While Feng Tay is ~14% of NKE's footwear orders, the correlation with NKE's footwear growth is an indicator of the direction of the brand's future expectations. We regressed Feng Tay's sales growth with NKE's footwear growth (lagged by one quarter) and the result was a 71% R-squared, statistically significant in our opinion.
Shares of Nike closed at $52.44 yesterday.
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