In a late Thursday report, athletic apparel giant Nike (NKE) revealed fiscal second-quarter earnings that surpassed expectations, though revenue aligned with forecasts. Despite the positive earnings, the Dow Jones retailer, acknowledging a “softer” sales outlook, announced plans to achieve up to $2 billion in cumulative cost savings over the next three years, initiating steps to streamline its organization. As a result, Nike’s stock experienced a significant decline in after-hours trading.
For the fiscal second quarter, Nike reported a nearly 1% increase in revenue to $13.39 billion, with earnings growing by 21% to $1.03 per share. Analysts had anticipated earnings of 84 cents and revenue matching at $13.39 billion. The company’s gross margin also exceeded expectations, expanding by 140 basis points to 44.6%, surpassing the consensus of 43.9%. Nike attributed this performance to strategic pricing, improved markdowns, and lower ocean freight rates, as noted in its late September Q1 2024 earnings report.
In response to the “softer” sales outlook, Nike is proactively seeking ways to achieve $2 billion in cost savings by 2026. The company outlined potential measures such as simplifying its product line, increasing automation and technology integration, organizational streamlining, and leveraging its scale to enhance operational efficiencies.
To implement these changes, Nike expects pretax restructuring charges of approximately $400 million-$450 million in the current fiscal Q3, primarily stemming from employee severance costs.
Chief Financial Officer Matthew Friend expressed optimism about Nike’s second-quarter financial performance, stating, “Nike’s second-quarter financial performance was a turning point in driving more profitable growth.” Despite a projected softer second-half revenue outlook, the company remains committed to strong gross margin execution and disciplined cost management.
Following the earnings announcement, Nike stock saw an 11% decline in after-hours trading. During regular market hours, the Dow Jones component had advanced 0.9% to 122.46 on Thursday. In December, prior to the earnings report, Nike stock had surged by 11%, building on consecutive monthly gains in October and November.
MarketSmith analysis reveals that NKE has been on a three-month rally, bringing its shares close to the May high and approximately 7% below the official 131.31 buy point in a cup base. There is speculation that Nike stock may form a handle.
Despite consolidating since May, Nike stock has rebounded nearly 40% from its September low. On December 11, Citigroup upgraded the Dow Jones giant, citing expectations of margin recovery. Citi analyst Paul Lejuez upgraded Nike to buy from neutral, raising its price target to 135 from 100. Lejuez remains optimistic about Nike’s ability to protect earnings in the 2024 and 2025 fiscal years, anticipating gross-margin recovery driven by leaner inventory, lower promotional activity, and direct-to-consumer benefits.
Looking ahead, Nike has a new innovation calendar set to roll out in 2024, coinciding with the Paris Olympics, and maintains a solid position in China. Citigroup sees a favorable risk-reward opportunity at the current stock levels.
As of now, the Dow Jones stock holds an 88 Composite Rating out of a best-possible 99, along with a 79 Relative Strength Rating and a 60 EPS Rating for Nike stock.
