Nike Is In An 'Innovation Reset', Brean Downgrades Stock

Brean Capital’s Eric Tracy believes Nike Inc (NYSE: NKE) is in the process of an “innovation reset,” and that there are limited upside catalysts for the stock in the near term, although the long term story remains intact.

Tracy downgraded the rating on the company from Buy to Hold.

Innovation Reset

The analyst mentioned the “innovation reset” was evidenced by the “consumer shift towards less technical, more lifestyle product,” which would need the company to focus on “more evolutionary product innovation.”

Also, futures growth in North America has been decelerating as the market resets.

Related Link: Nike Beats Big On Earnings And Revenue, But The Stock Is Crashing

Low Quality Beat

Nike reported Q1 results, with the EPS of $0.73 well ahead of the estimate, driven by better than anticipated revenue growth, lower tax and lower shares, partly offset by a 200 bps year on year gross margin decline.

Tracy noted that the quality of the upside was relatively low, especially given that the expectations had been set low.

In addition, North American futures growth significantly decelerated in Q1, rising only 1 percent, as compared to 6 percent in Q4 and average growth of 11 percent over the past five years.

Tracy believes “investor focus on North America is somewhat myopic given geographic diversity of rev base, and even acknowledging better sell-through/ a shift towards at-once orders that should help drive greater rev outperformance relative to futures growth.”

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