Nike shares surge as inventory challenges start to abate, demand stays strong

11:12 am Wednesday, December 21st, 2022

(Reuters) -Nike Inc’s shares soared nearly 15% on Wednesday as investors shrugged off margin pressure at the sportswear giant and focused on the company’s efforts to fix its inventory problems that have plagued its business in recent quarters.

At least 15 brokerages raised their price targets on the stock after Nike reported better-than-expected quarterly results on Tuesday, benefiting from higher discounts and strong demand in North America.

“Nike’s second-quarter performance proves the brand remains strong, margin drivers are intact and global demand is healthy,” said Jefferies analyst Randal Konik, who was among the most bullish and raised his price target by $25 to $140.

In September, Nike said its inventories ballooned 44% to nearly $10 billion at the end of the first quarter and warned of weaker margins, stoking fears across the industry that consumers were cutting back on discretionary spending due to inflation.

“We believe the inventory peak is behind us as actions we’re taking in the marketplace are working,” Nike Chief Executive John Donahoe said on a post-earnings call on Tuesday.

While Nike’s inventory at the end of the second quarter declined about 3% sequentially, margins fell 300 basis points due to higher promotions and discounts.

Still, the decline was smaller than expected, according to analysts, thanks also to higher-priced new products such as the LeBron 20s and Nike Mercurial shoes.

“Nike offered promotions, but at the same time, they also pushed for new product without the promotion,” said Jane Hali & Associates analyst Jessica Ramirez.

Nike’s sales in North America surged 30%, while those in China – where the business was recovering from lockdowns – fell only about 3%, following a 16% slump in the first quarter.

“We see Nike as a must-own discretionary stock heading into (2023),” Credit Suisse said.

The company’s shares, having fallen about 38% this year, touched an over six-month high of $119.18 in early trading.

(Reporting by Aishwarya Venugopal and Deborah Sophia; Additional reporting Ananya Mariam Rajesh in Bengaluru; Editing by Maju Samuel)