Nike, Inc swooshes higher on results and outlook

• NIKE, Inc shares surged on strong results and outlook.

• The stock might be in a reversal, but it needs to clear a key level.

• Analyst’s sentiment is warming, and a string of positive commentary could be the catalyst this market needs.

• 5 stocks we like better than NIKE.

NIKE, Inc. (NYSE: NKE) stock is set up for a reversal, and the 2023 outlook may drive it. The company just reported earnings for CQ4 and not only beat on the top and bottom lines but showed significant improvement in its inventory position.

This is important because bloating inventories and the need to clear them have pressured margins in a world of rising inflation. With NIKE showing improvement, it looks like margins and earnings will improve as well, which drives the value of stocks. So if NIKE shares are worth X today with margins under pressure, it should be worth more tomorrow with margins on the mend and the earnings outlook brightening.

NIKE results impress the analysts

NIKE, Inc had an astonishing quarter, given the weakness shown in previous quarters and the outlook for inventory and discounts. As a result, the company leaned heavily into promotional activities during the quarter, which resulted in $13.32 billion in sales, up 17.3% from last year.

The strength was driven by all channels, led by a 25% increase in NIKE Brand Digital. In addition, NIKE Direct and Wholesale grew by double digits, including a significant headwind from FX. On an FXN basis, sales are up 34%, 30% and 25% by segment, with NIKE Brand Digital leading the way.

There is some bad news in the report, but it is better than expected bad news and is helping to support the price action. That news is the margin which contracted at the gross and operating levels. Margin contraction is attributed to markdowns, channel shifts, rising wages and higher input costs but was not enough to offset the top-line strength.

On the bottom line, the company reports $0.85 in GAAP earnings which are not only up 2% from last year but beat the Marketbeat analyst's consensus by 3200 basis points.

NIKE, Inc did not give formal guidance, but the results are precise, and the CEO commentary is optimistic. The net result is that four analysts from top-tier firms like JPMorgan Chase and The Goldman Sachs Group set targets for the stock above the current consensus. The consensus of 31 analysts, including the four new targets, is about $122, about 18% above the pre-release price. The peace of the four new targets is closer to $132 and another 800 basis points of potential gains.

NIKE returns capital to shareholders

NIKE's cash balance fell during the year but remains strong at over $10.5 billion. The cause is an increase in inventory due to overlapping comps versus last year, the rising cost of inventory due to inflation and share repurchases. The takeaway on the inventory front is that inventory is up 44% YOY (versus last year's supply-chain-disrupted figure) but down 400 basis points sequentially.

Regarding repurchases, the company bought back $1.6 billion worth of stock and retired it, that's about 16.5 million shares, and there is still more than $15 billion left under the current authorization. That's worth about 9% of the market cap to investors and will support price action over the long term.

The technical outlook: NIKE is in reversal

The price action in NIKE is up more than 10% in premarket trading and has the stock in reversal. The question is if the market can get above resistance at the $115 level. If not, this stock has reversed from down to sideways but if so, it is a full reversal that could drive shares up to the $140 level in the near to short-term.