Dow Tumbles Nearly 500 Points as Nike Guidance Spooks Investors

The Dow Jones Industrial Average fell almost 500 points today as the bear market recovery stalled. Stocks enjoyed a nice week last week and some investors wondered if the market had bottomed and was finally turning the corner but it looks like there could still be selling pressure ahead.

After all, many experts now expect some kind of recession to occur later this year or early next year, as inflation has created a problem for the Federal Reserve, which has been raising interest rates rapidly to bring down consumer prices. Typically, when the Fed becomes very hawkish it can hurt the economy because higher interest rates raise the cost of debt and slow overall economic activity.

One stock today hurt the Dow more than any other, not only because of the broader market but also because of company-specific news.

Flat margin guidance

Shares of Nike (NYSE: NKE) fell roughly 7% today after the large sports and footwear apparel brand reported earnings results late yesterday.

For its fiscal fourth quarter of 2022, which is the three months ending on May 31, Nike reported diluted earnings per share of $0.90 on total revenue of $12.2 billion. Both numbers beat analyst estimates for the quarter.

However, on the earnings call, Nike's CFO Matt Friend said the company is "taking a cautious approach to Greater China given [the] uncertainty around additional COVID disruptions."

China, where Nike has many factories, has been difficult to gauge. As COVID-19 cases began to surge earlier this year, the Chinese government locked down or placed severe restrictions in major cities like Shanghai and Beijing. The government has now started to lift those restrictions and is trying to jump-start economic growth again, but it's hard to know if there will be more lockdowns if cases surge again.

Friend also noted that the company is experiencing headwinds from "elevated ocean freight costs, increased product costs, discrete supply chain investments and normalization of historically low markdown rates."

While Friend said the company expects revenue in the fiscal year 2023 to grow in the low double-digit percentage range, he also said to expect gross margins somewhere between flat or down half a percent versus the fiscal year 2022, a wider range than normal given the uncertainty.

Following the call, many analysts trimmed their 12-month price targets for Nike, although most still imply significant upside from Nike's current share price of just below $103 per share, which is down close to 37.5% this year.

Should you buy Nike?

For all of the selling today, Nike still beat earnings projections and should benefit as supply chain issues ease and COVID-19 hopefully become less prominent. Despite cutting their price targets, analysts are still quite bullish on Nike.

The company has a strong brand that should retain loyalty and enable the company to pass some of its higher costs onto its customers.

However, I also feel that it's more of a niche brand with largely specialty athletic equipment that consumers don't necessarily need in the same way they might need a smartphone. I think Nike is a buy at these levels, but it's not my favorite stock to fight a recession or inflation.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Nike. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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