Nike's one biggest catalyst for 2024: Analyst explains

Bank of America upgrades Nike (NKE) shares to a Buy rating from a Neutral rating. Bank of America Securities Analyst Lorraine Hutchinson — who was behind the stock call — wrote that "estimates finally look achievable" and that the brand's valuation is "finally looking compelling" in her note to investors.

Hutchinson sits down with Market Domination to discuss Nike's revised growth narrative as it makes some of its more sought-after Jordan shoes accessible and prepares for the tidal wave of exposure expected from the 2024 Summer Olympic Games.

"What we expect is that newness and innovation to hit. We then anticipate a lot of marketing and demand creation spending in their first quarter ahead of the Olympics," Hutchinson states. "When we look back, Olympic quarters have grown about 500 basis points above a regular 1Q, because of all this effort, all this product. I think it's a really exciting time for Nike, and I think they will try to capitalize on that moment by really bring the innovation."

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This post was written by Luke Carberry Mogan.

Video transcript

JOSH LIPTON: Shares of Nike getting a boost. Thanks to an upgrade from Bank of America to buy from neutral. The analysts saying it's time to get off the sidelines with several key catalysts on the horizon, including an investor day and the upcoming summer olympics. Joining us now is the analyst behind that call bank of America Securities senior retail analyst Lorraine Hutchinson. Lorraine, it is great to see you. So you take Nike to a buy rating in part. You say valuation here looks attractive at these levels. You also say estimates finally look achievable. How come, Lorraine?

LORRAINE HUTCHINSON: Yeah. Look, when you look at Consensus for 2025, the estimates have come down by 35%. So I think when I see consensus of $4, for 25, for 50, for 26. I think that's a really achievable bar. Nike growing over the long term at a mid-single digit top line with some modest margin expansion is appropriate and really achievable in my view. They have made some mistakes to get those-- to bring those numbers from so high to so low.

But I think they're finally admitting the mistakes and really taking some bold steps to fix them. So we think with consensus estimates starting to bottom. It's really an interesting time to start looking at the stock on the long side.

JULIE HYMAN: Now one of the strategy shifts that they're making Lorraine, has to do with their Jordan strategy. And this includes making them more available. Now it's a tricky line to toe because they want to make them more available so that people can buy them. But they don't want to make them a commodity. So how do they do that and do you think they'll be successful?

LORRAINE HUTCHINSON: Yeah. Look, it is a tricky. It's a tricky thing to do. And what they're trying to do is make Jordan slightly more accessible to the masses. So they'll still have a sold out hot product drop. But they'll also launch some product that will sell at a slightly more accessible price point. It's a tough thing for a brand to do. And in fact, there's only really one brand I've ever seen do this well. And it's Nike. In the core Nike brand they have some really high end product.

And then they also have some product in the family channel. What they've done well is they've stratified it and they've been sure to put a lot of marketing dollars and a lot of innovation behind the high end. So they've been able to have a very broad reach with the existing brand. And I think they're looking to do this for Jordan as well.

JOSH LIPTON: Lorraine, Sam Poser, the analyst, he's covered this sector and Nike a long time. He recently downgraded Nike to a sell. And in part Lorraine, he really went after Nike leadership in that note. Said, financial goals, in fact are leading merchandising decisions. Said, many of those driving the direction of the company are using spreadsheets rather than the educated gut. But I guess, you obviously, you disagree with that Lorraine?

LORRAINE HUTCHINSON: Well, look, I think this last quarter, they finally came out and proactively took estimates down. So that was the first time I've really seen them do that. They came out and they said first half of fiscal 25 sales will be down. And it's because we're purposefully removing units from the market so they don't get stale. That to me is a very healthy thing to do. And it's a very good thing to do. But look, over the past few years, the performance has not been good. And when I look at how this management team has been compensated.

If you think about their fiscal 2023 goals, it was split into three topics, revenue growth, EBITDA growth and digital growth. So they were trying to dictate the way the consumer buys their product by putting such a huge goal in their compensation structure to get them over to digital. The consumer will buy where they want to buy. So I think what's happening now is they're pivoting back to say, if you want to come into wholesale and try on those shoes before you buy them, we don't mind.

However, way you want to buy Nike we're happy with it. I think the compensation structure has normalized to take that digital metric out. And I think that's a really big sign that they're letting the consumer decide again rather than trying to dictate it.

JULIE HYMAN: And then we began the conversation by saying there are some upcoming catalysts for Nike. One of them is the Olympics, which traditionally has given the company a boost, combine that exogenous catalyst with how you think Nike is going to capitalize on it with some of these new strategies?

LORRAINE HUTCHINSON: Sure. So Nike is great at capturing moments, the Olympics are a great example of this. So what they're doing actually yesterday and today in Paris is launching a significant amount of innovation around the Olympics. And so what we expect is that newness and innovation to hit. And we'd anticipate a lot of marketing and demand creation spending in their first quarter ahead of the Olympics. When we look back Olympic quarters have grown about 500 basis points above a regular 1Q because of all this effort, all this product.

So I think it's a really exciting time for Nike and I think they will try to capitalize on that moment by really bringing the innovation. And that ties into the broader strategy, which is admission and acknowledgment that they have not been fast enough or bold enough with their innovation. And really moving toward launching more of it. They've cut-- they've planned to cut about $2 billion of expenses out of their cost structure. And then reinvest almost all of it right back in. So that will happen over the course of a few years.

But I think this big push for the Olympics is one of the first things that we'll see as they really focus on trying to heighten the newness.

JULIE HYMAN: And the shares up about 3.5% today. Lorraine, thank you.

LORRAINE HUTCHINSON: Thanks.