Nike released FY third-quarter results after the market close Tuesday that beat Wall Street’s expectations, but bloated inventory and sales in China that fell short of expectations squeezed the company’s margins again. NIKE Direct sales were $5.3 billion, up 17 percent on a reported basis and up 22 percent on a currency-neutral basis. NIKE Brand Digital sales increased 20 percent on a reported basis, or 24 percent on a currency-neutral basis.
Nike Inc NYSE: NKE Reported Earnings After Close Tuesday
$0.79 beat $0.55 EPS and $12.39 billion Beat $11.47 billion Revenue Forecast
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
Nike Earnings Fiscal Q3 23 Earnings
- Net income for the three-month period that ended Feb. 28 was $1.2 billion, or 79 cents per share, compared with $1.4 billion, or 87 cents per share, a year earlier.
- Adj EPS: 79 cents vs. 55 cents expected
- Revenue: $12.39 billion vs. $11.47 billion expected and from $10.87 billion a year earlier.
- NIKE Direct sales were up 17% during the holiday quarter to $5.3 billion
- NIKE Brand Digital sales increased 20%. Digital sales represented 27% of sales, up from 9% at the end of fiscal 2019.
- Wholesale revenues were up 12% in the quarter, following 19% growth during the previous quarter. Nike has, over the last two quarters, relied on partnerships with wholesalers to offload inventory.
- On Monday, Foot Locker CEO Mary Dillon touted a “renewed” and revitalized relationship with Nike, its biggest brand partner.
- Regions: Sales in China fell 8% during the third quarter to $1.99 billion, despite the end of the country’s zero-Covid policy that had weighed on operations. Wall Street analysts had anticipated sales in the region of $2.09 billion, according to StreetAccount estimates.
- Outside China, Nike saw double-digit sales increases in all of its other markets. Sales in North America were up 27% and in Europe, Middle East and Africa, revenue jumped 17% compared with the year-ago period. In Asia Pacific and Latin America, sales were up 10%.
- Revenues for Converse were $612 million, up 8 percent on a reported basis and up 12 percent on a currency-neutral basis, led by double-digit growth across all channels in North America, partially offset by declines in Asia.
- Revenues for the NIKE Brand were $11.8 billion, up 14 percent on a reported basis and up 19 percent on a currency-neutral basis, with double-digit growth in North America, EMEA and APLA. Greater China grew 1 percent on a currency-neutral basis despite a challenging December following the shift in the country’s COVID-19 policies. On a reported basis, revenues for Greater China declined 8 percent.
- Gross margin decreased fell to 43.3% for the quarter, a decrease of 3.3 percentage points, due to higher markdowns and promotions the company used to liquidate its inventory.
- Selling and administrative expenses were up 15% to $4 billion, the bulk of which was related to wage-related expenses and Nike Direct costs. The company expects full year expenses to be up 10%.
- Cash and equivalents and short-term investments were $10.8 billion, down approximately $2.7 billion from last year, as cash provided by operations was more than offset by share repurchases, cash dividends and capital expenditures.
- Inventories for NIKE, Inc. were up 16% compared with the year ago period at $8.9 billion, which the company attributed to higher product input costs and elevated freight expenses. During the earnings call executives said they’re “increasingly confident” Nike will exit the fiscal year with healthy inventory levels. They also expect to see “even leaner inventory” than they’d anticipated given sales momentum.
- Dividends of $528 million, up 9 percent from the prior year.
- Share repurchases of $1.5 billion, reflecting 12.9 million retired shares as part of the four-year, $18 billion program approved by the Board of Directors in June 2022. As of February 28, 2023, a total of 32.0 million shares have been repurchased under the program for a total of approximately $3.4 billion.
Stock Market Reaction to Earnings
- NKE 125.61 ▲ +4.41 (+3.64%) today
- NKE 122.79 ▼ 2.82 (2.25%) After Hours
- Earnings Insight: Nike has exceeded EPS estimates in 9 straight quarters until last quarter, missing revenue expectations twice in that span.
“NIKE’s strong results in the third quarter offer continued proof of the success of our Consumer Direct Acceleration strategy,” said John Donahoe, President and CEO, NIKE, Inc. “Fueled by compelling product innovation, deep relationships with consumers and a digital advantage that fuels brand momentum, our proven playbook allows us to navigate volatility as we create value and drive long-term growth.”
China, is Nike’s third-biggest market by revenue.
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.
When asked about its outlook on China’s recovery, Nike CEO John Donahoe said the company feels good about its momentum in the region and saw growth “really pick up” in the second month of the quarter after lockdowns ended.
“The fundamentals of this market are good, right? It is a very large market that’s growing. Sport and wellness is a key trend and tailwind there. There’s a desire for innovation and style. And the key to winning in this market is simply put: having great innovation and connecting with Chinese consumers in a locally relevant way,” Donahoe said.
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 last year 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 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 expects fiscal year revenue to grow by high single digits, compared to mid single digit guidance it gave in the prior quarter. It expects gross margins to decline by 2.5 percentage points, which is the low end of the previous guidance range given and reflects Nike’s ongoing efforts to liquidate excess inventory, along with other costs.
In the next quarter, Nike expects flat to low single digit revenue growth. Finance chief Matthew Friend said the company is taking a “cautious approach” to planning, given uncertainty about consumer confidence and the economy.
“We have managed through cycles like this before and we will be well prepared for the volatility that is in font of us,” he said.
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.
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).
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