Near-Term Headwinds Send Nike To The Bargain Basement

• Nike falls on a mixed FQ1 report that has the analysts worried about margins. 
• Bloating inventory led to increased markdowns and this is expected in Q2 as well. 
• Near-term headwinds are weighing on shares but a long-term buying opportunity is on the way. 

Nike's Fq1 report is a wake-up call for investors who haven't clued in to the fact that inventories are bloated across the retail universe. Pandemic spending and supply chain hurdles still plague the industry despite the cause beginning with the shutdowns. Target and Walmart both warned about their inventories earlier this year, and that will be echoed by other companies.

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The need to shed inventory is leading to markdowns, wholesale actions, and declining margins that may plague the industry well into the future and that is weighing on Nike's share prices. In the wake of the report, the stock is down more than 10% and headed into the bargain basement. There is a chance that Nike's share price will retest the lows before the correction is over because the stock is trading at 27X its earnings.

The Sell-Side Is Selling Nike, Inc

Although their net holdings and trading activity are insignificant, the insiders have been selling the stock. The shift in institutional activity is amplified by the fact that the insiders have only held 0.4% of the stock. Two quarters ago, the institutions became bearish on the stock. The pace may pick up now that Q1 results are in, as the balance of activity is a net reduction worth a little more than 1%) of the market cap. B. Riley Wealth Management slashed 25% of its holdings in September.

Nike is still rated a Moderate Buy by the analysts. The Moderate Buy consensus rating has held steady over the last 12 months, but is edging lower since the F Q4 and now the F Q1 results. Three commentaries were released in the days leading up to the release and another 17 after it, all of which included price target reductions. The one that didn't lower its price target issued a downgrade to neutral from buy. The analysts still see upside for the stock, but it's not good for share prices.

Revenue and earnings for Nike were both better than the analyst consensus estimates. The good news is that revenue grew by 3.6% and beat the consensus by 330 basis points, but the bad news is that it shaved 220 basis points off of the gross margin. The GAAP earnings were better than expected but still trailing top-line strength. If the mark-down activities continue into the Q4 period and there is no reason to think they won't, there will be more weakness with the added risk of slowing sales volume. On a year-over-year basis, inventory is up 44% with a good portion stuck in transit.

Matthew Friend, Executive Vice President and Chief Financial Officer, said, "Our focus continues to be the consumer, as we take action to navigate near-term dynamics while expanding long-term structural benefits."

The Technical Outlook: Nike Falls To 30-Month Low

Nike fell to a 30-month low on the news and its earnings, dividends, and buybacks could not help it. There is a chance that the stock could support near $65 or even $80. Nike is an attractive stock if the market confirms support at one of these levels and there is an improvement in the outlook.