Nike Q2 earnings set to reflect COVID-era supply strains, impact from Asia

Analysts polled by Bloomberg predict Nike will report adjusted earnings per share (EPS) of $0.62 on revenue of $11.26 billion.

Like many athletic wear brands, Nike was hit hard by COVID-19 related factory closures in Vietnam throughout the summer, as well as supply chain delays that have snared the global economy. Meanwhile, Vietnam is experiencing another surge in coronavirus infections, even with 70% of the country’s population being vaccinated.

Nike is heavily reliant on manufacturing in Asia, where governments have taken a hard line on containing the spread of COVID-19. The resurgence of the virus around the world has some on Wall Street bracing for a letdown.

“We expect this quarter will lack the excitement of the last two earnings reports, which first was a positive surprise when management announced an updated 5yr plan, followed by a negative surprise when they reduced [quarterly] sales guidance by $3 billion (5%),” Bank of America analyst Lorraine Hutchinson wrote in a preview note on Tuesday.

Hutchinson added that Nike has already “telegraphed a few challenging quarters ahead given supply chain constraints, with the worst impact in 3Q.”

Bank of America analysts remain Neutral in their rating, with a target price of $166.84 as they look for “more visibility on the rebound in China.”

It’s been nearly two years since China shut its international borders as part of its efforts to keep coronavirus out. However, as the pandemic drags on, local outbreaks have continued to flare up, prompting widespread lockdowns and testing protocols to resume.

Still, UBS analyst Jay Sole told Yahoo Finance on Friday he remains bullish this quarter, despite the slow economic recovery in China and the ongoing supply-chain headwinds.

“I think the biggest thing that's gonna come out of the earnings call is an update on how Nike sales performance is progressing in China – that's top of mind for investors right now,” Sole said.

Challenges in China continue to bring uncertainty on the brand’s future outlook. Nike has faced heavy criticism earlier this year after workers boycotted amid allegations surrounding the use of forced labour to produce cotton for the country’s western region of Xinjiang.

“The market sort of wants to know if there is any lingering impact from those boycotts – is that over, how are the COVID intermittent shutdowns that China has had– are [they] impacting business,” Sole said.

“People want to know how the overall macro- economy in China is impacting Nike's business. It's important because China as a region is probably going to be Nike's strongest growth territory,” the analyst added.

Despite the last few difficult quarters, Nike has had some major wins — including the recent purchase of RTFKT, a digital creator of virtual sneakers, collectibles and accessories. The latest move signals Nike’s bet that the future of retail lies in the metaverse.

"Brands have an incentive to be there because that's where people are and they want to follow them," Michael Pachter, an analyst with Wedbush Securities, said in a note. 

Telsey Advisory Group expects to see strong demand in Europe, North America and Africa, "consistent with recent commentary from US athletic retailers and global brands. We expect Nike to maintain the FY22 guidance it provided on its last earnings call in late September, which incorporated the impact of the manufacturing shutdowns."

The firm also pointed out Nike’s success with its loyalty programs, where they said the Oregon-based brand will continue “ to benefit from enhanced connections with consumers.”

Analysts issued an “outperform” rating and are raising their 12-month price target to $190 from $176, which they are attributing to “strong demand and improving production in Vietnam.”

SOURCE: Yahoo Finance

Image Source: Pixabay.com