NIKE May Benefit from Fashion Trends

Nike is one of the first major fashion brands to report this season, but how is the downshift in fashion affecting the company's outlook?

The New Trends

With constant warnings of a recession and general worries about the rising cost of living, consumers are becoming more thrifty and less ostentatious about brands. Along with the rise of "quiet luxury" is the boom in athleisure, with consumers trading in designer brands for more comfortable items. Not for nothing, Nike had the confidence to raise its guidance when it last reported earnings (its fiscal third quarter) back in March. But, not everyone is convinced that the stock will be doing so well this time.

Last quarter saw Nike building inventory due to higher input costs, with sales only keeping pace. Margins were impacted as the company cut prices to move inventory, even as its second-largest customer - China - was expected to grow. The President and CEO, John Donahoe,  was still optimistic about seeing growth in China (17% of the company's revenue), but since then, news from the world's second-largest economy hasn't been as auspicious. Investors might be keenly focused on whether the company comes down to earth with its outlook for China. Even analysts forecasting a beat in earnings are cautious about the outlook, citing China.

Powering Through

Aside from the Chinese market, Nike has managed to do well in its main market: the US. It reported revenue growing at 27%, well-outpacing inventory costs. More optimistic analysts point to the company's ability to generate consistent cash flow, which will help it maintain its returns to investors and support the stock price.

From the company itself, however, there are signs of concern, as last month it announced a major shakeup of the leadership team, with a focus on emphasis on marketing. The case for being more optimistic seems to rely more on getting through a tough short-term patch and focusing on longer-term secular growth, pointing to fashion trends supporting more athletic and leisure. The China rebound might not manifest in the short term, but that might allow the company to double down on its core markets that offer better margins. Growth is good; profits are even better.

Nike in Bullish Pattert?

Nike's stock price might see further upside if bulls can reclaim $116, increasing chances of ending a flag pattern down at  $103 and currently under a broadening wedge or three-rising-valleys pattern. If the upside continues, the price could extend the length of the $103-$114 leg, sending the stock as high as $127. Conversely, if the lower trendline weakens, the bullish pattern(s) may get invalidated, with Nike spiralling towards double digits

Source: SpreadX / NIKE

Key Takeaways

Nike benefits from current fashion trends, particularly the rise of "quiet luxury" and athleisure. However, there are concerns about the company's outlook in China due to inventory build-up and potential economic challenges. Despite this, Nike has been performing well in its main US market, with revenue growing at 27% and strong cash flow generation. The company's focus on longer-term growth and ability to maintain returns to investors are seen as positive factors.