Nike Brand Power and North American Sales Fail to Overcome China Weakness

Nike reported softer Q4 2022 results after the close Monday as expected, and guided down FY23 margins. Fourth quarter revenue missed estimates in North America and China. The many headwinds took their toll, tough comps in North America, lockdowns in China, Russian exit, strong USD and supply chain pressures. Nike’s consumer demand in $NKE’s biggest market North America needed vigorous demand to balance but not to be. Board authorized a new $18 billion buyback program

How much has the consumer been hurt by high interest rates and inflation? We did not see the benefits that Academy Sports + Outdoors saw with better-than-expected 1Q23 earnings bolstered by the American enthusiasm for outdoor activities, sports, and recreation? Business in China remains pivotal with varying backlash in China amid global tensions and Chinese lockdowns. Nike’s strong digital revenue growth continues.

Nike Women Athlete

Nike Inc NYSE: NKE Reported Earnings After Close Monday

$0. 90 Beat $0.81 EPS and $12.23 Beat $12.07 Billion forecast in revenue. 

Earnings Review

Q4 2022 earnings released at 4:15 p.m. ET; conference call at 5 p.m. ET

  • EPS: $0.90 VS $0.93 Y/Y Projected EPS: 81 cents
  • Revenue: $12.23B v Projected revenue: $12.07 billion
  • Gross Margin: 45% (est 46.7%)
  • Greater China Revenue: $1.56B (est $1.74B)
  • Board Authorized a New $18 Billion Buyback Program

Highlights

  • Revenue fell 1% (+3% ex-foreign exchange).
  • A write down of inventory in China was a 200 bps impact on Q4 gross margin,
  • Management sees strong demand and expects the Chinese market to improve by end of Q2.
  • Nike expects strong sales in FY23 offset by a conservative outlook on gross margin (flat to down 50 bps) due to elevated shipping costs.
  • The company faced considerable headwinds in recent quarters but is well positioned to continue taking share going forward.

Nike compared to last quarter

Nike’s last report, Q322 highlighted the companies incredible brand power with NKE exceeding earnings and revenue expectations. What we liked was, like with $ASO, the company overcame supply chain and logistics disruptions. In the coming quarter we want to see if those inventory-limiting issues have improved. This comes with NKE’s reaffirmation in it’s FY22 guidance still calling for mid-single-digit revenue growth, driven by robust demand and an improving supply chain situation.

Last quarter CFO Matthew Friend said during the earnings conference call all factories in Vietnam were operational. Consequently, production of footwear and apparel is now at lockdown volumes, setting the stage for inventories to improve moving forward. Inventories were up 15% in Q3.

What was impressive in last quarter even with significant raw materials inflation and higher freight and logistics costs, gross margin expanded by 100 bps yr/yr to 46.6%. A tight inventory market, coupled with NKE’s impressive pricing power, enabled the company to reduce promotions and to generate a large percentage of sales at full price. This factor also bolstered before Academy and Dick’s margins, highlighting the consumer’s thirst for sporting goods and apparel.

NKE’s strategy is to take more control over its brand by eliminating or scaling down partnerships with retailers. This move is steering more customers to NKE’s direct channels (Nike-owned stores and digital platform), where the company can manage inventory and pricing while attaining customer data. NKE is cutting ties with DSW this year and has lowered its exposure to Foot Locker (FL).

Bolstered by 33% growth in North America, Nike Brand digital sales were up 19% in Q3, despite lapping growth of 59% in the year-earlier period.

China

China though is a source of weakness for NKE. Heading into this earnings report, there are concern that its business there took more hits as lockdowns spread across the country. There is hope with its brand strength, if we look at last quarter the sales decline moderated to -8% quarter from -24% the prior quarter.

Since then though lockdowns in China have accelerated after the quarter was over in February and right into June. In that conference call Friend acknowledged that the impact from lockdowns in Q4 is unclear at this point, but he expressed optimism that momentum will continue to build in China.

Russia

Another factor is Russia. Nike announced plans to permanently exit Russia after halting its online operations in the region and closing its stores in March following the invasion of Ukraine. Russia has become economically isolated since then and is currently working on legislation to punish foreign companies that leave its soil.

Nike said the halting of operations there may impact the balance sheet in its last earnings report’ This was a factor NKE didn’t issue FY guidance. Given Nike revenue from Russia was less than 1% last report, so unlikely a big factor.

Nike is one of a number of major brands pulling the plug on Russia. Cisco announced plans to leave, and McDonalds, Renault, and Starbucks have all pulled out.

Nike in the Metaverse

Last year Nike announced it bought virtual sneaker company RTFKT for an undisclosed amount, making a bet on the metaverse. Formed in 2020 by Benoit Pagotto, Chris Le and Steven Vasilev, RTFKT also makes NFT collectibles and memes.

“This acquisition is another step that accelerates Nike’s digital transformation and allows us to serve athletes and creators at the intersection of sport, creativity, gaming and culture,” Nike Chief Executive Officer John Donahoe said in a statement at the time.

Nike had been filing trademarks indicating its intent to make and sell virtual Nike-branded shoes and apparel.

“We’ll invest … to deliver next-generation experiences that involved RTFKT and Nike brands,” said Donahoe on an earnings call.

 


What to Watch for in Nike Earnings

  • Sales in North America
  • Sales in China
  • Sales at the Converse brand
  • Sales for the Nike brand, footwear sales, apparel and equipment revenue
  • Digital sales
  • Expenses for shipping and returns
  • Nike’s margins
  • Inventories

About Nike

Nike is based in Beaverton, Oregon. NIKE, Inc. includes the Nike, Converse, and Jordan brands. Nike, Inc. is involved in the design, development, manufacturing and worldwide marketing and sales of apparel, footwear, accessories, equipment and services. Nike is the world’s largest supplier of athletic shoes and apparel and a major manufacturer of sports equipment

Nike sponsors many high-profile athletes and sports teams around the world, with the highly recognized trademarks of “Just Do It” and the Swoosh logo (which represents the wing of the Greek goddess Nike).

Source: Nike

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