Wide-Moat Nike Overcomes Inventory and Other Challenges to Post Solid Q2 Sales; Shares Attractive

Highlighted by a 17% (27% constant currency) revenue increase that eclipsed our 10% forecast, Nike outperformed our expectations in fiscal 2023’s (November-ended) second quarter despite concerns of slowing consumer spending due to inflation and widespread industry discounting. Nike itself has needed to implement markdowns to clear an excessive amount of out-of-season apparel, especially in North America. While its gross margin dropped 3 percentage points to 42.9% (slightly above our 42.3% estimate) and its inventories remained high (up 43% from an unusually low level last year), we believe both metrics are set to improve in the coming quarters due to sales momentum, product releases, and the reopening of China’s economy after months of virus-related restrictions. Given these trends and the quarterly outperformance, we expect to lift our $129 fair value estimate on Nike’s shares by a mid-single-digit rate. After this lift, we still view its shares as attractive despite a 13% jump in post-market trading on Dec. 20. We believe Nike’s results in a difficult footwear and apparel market support our wide moat rating based on its brand intangible asset.