Nike released mixed first-quarter results after the market close Thursday. $NKE after guiding down FY23 margins. Revenue in Greater China fell 16% but was more than offset by gains in Asia Pacific & Latin America (+5%), North America (+13%) and Europe, Middle East, & Africa (+1%). Tough comps in China have hampered the sportswear giant. Chinese operations should help Nike going forward with Beijing’s new policies loosened Covid-19 restrictions to lift the economy. Gross margin fell 220 basis points to 44.3% of sales vs. 45.4% consensus.
Consumers have been hurt by high interest rates and inflation. Nike’s strong digital revenue growth continues at $5.1B were up 8% on a reported basis and up 14% on a currency-neutral basis
Nike Inc NYSE: NKE Reported Earnings After Close Thursday
$0.93 beat $0.92 EPS and $12.69B Beat $12.31 Billion Revenue Forecast
Nike Earnings Fiscal Q1 23 Earnings
- Net income was $1.5 billion, down 22%
- Adj EPS: $0.93 v Consensus EPS Estimates: $0.92
- Revenue: $12.69B v Consensus Revenue Estimates: $12.31B
- NIKE Direct sales were $5.1 billion, up 8% on a reported basis and up 14% on a currency-neutral basis
- NIKE Brand Digital sales increased 16% on a reported basis, or 23% on a currency-neutral basis, led by 46 percent growth in EMEA
- Regions: A drop in revenue in Greater China (-16%) was more than offset by gains in Asia Pacific & Latin America (+5%), North America (+13%) and Europe, Middle East, & Africa (+1%). Footwear sales were up 17% to $3.81B, while apparel sales rose 4% to $1.49B
- Revenues for Converse were $643 million, up 2 % on a reported basis and up 8% on a currency-neutral basis, led by double-digit growth in North America and Europe, partially offset by declines in Asia.
- Gross margin decreased 220 basis points to 44.3% “primarily driven by elevated freight and logistics costs, lower margins in our NIKE Direct business driven by higher markdowns, and unfavorable changes in net foreign currency exchange rates, including hedges, partially offset by strategic pricing actions.”
- The overall decrease in margins was primarily driven by North America liquidating excess inventory through NIKE Direct markdowns and wholesale marketplace actions.
- Selling and administrative expense increased 10% to $3.9 billion.
- Cash and equivalents and short-term investments were $11.9 billion, down approximately $1.8 billion from last year, as free cash flow was offset by share repurchases and cash dividends.
- Inventories for NIKE, Inc. were $9.7 billion, up 44 percent compared to the prior year period
- Dividends of $480 million, up 11 percent from the prior year.
- Share repurchases of $1.0 billion, reflecting 9.0 million retired shares.
- NKE 95.45▼ 3.25 (3.29%) today
- NKE 90.80▼ 4.53 (4.75%) After Hours
- Earnings Insight: Nike has exceeded EPS estimates in 9 straight quarters, missing revenue expectations twice in that span.
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
Analysts’ actions ahead of earnings
Cowen analyst John Kernan noted that China “remains a major swing factor” for Nike’s potential results in Q1. However, the analyst said he expects China to return to growth in Q2 and added that “Nike continues to significantly outperform Adidas globally from an execution standpoint.”
Jane Hali & Associates (JHA) LLC analyst noted potential headwinds in China and looked for Nike’s performance in EMEA and North America could offset the losses. Overall, JHA said it was “Neutral” on Nike for Q1, though optimistic about its long-term potential.
“Nike is one of the most modern brands across its product and retail strategy,” JHA said in a note to clients. “The brand puts the consumer at the center of its evolution and uses data-driven insights to create a localized approach that reaches consumers across the globe.”
Barclays analysts downgraded to a Hold-equivalent rating, cutting its price target to $110 from a prior $125. The downgrade from “Overweight” to “Equal Weight” was motivated by waning wholesale demand, lingering lockdown risks and general volatility in China sales, elevated inventory levels, and foreign exchange headwinds that are especially impactful in Europe, the note explained.
“We believe that NKE could deliver FY1Q23 in-line sales and EPS if they again pull back on demand creation,” the note read. “However, we believe such a composition of the quarter would be low quality, and we are more interested in current and forward-looking demand trends and future margin risk.”
The report added that excess inventories are likely to exacerbate margin pressure, with significant promotional activity expected into year-end. As such, “further EPS risk” is expected into the Spring of 2023 that the nearly 35% decline for shares thus far in 2022 has not yet accounted for, in Barclay’s analysts’ view.
“Despite already-cautious investor sentiment, we believe that margin expansion will be more challenged in the medium-term, and therefore pressure on earnings may make it difficult for NKE to break out of a trading range over the next 12-to-18 months,” the note concluded.
RBC Capital Markets analyst Piral Dadhania initiated Nike with an “Outperform” rating on the stock with a $125 price target in a note on Thursday. He noted that RBC forecasts the sporting goods industry to grow 7% per annum, led by strong growth in the Asia pacific region. Additionally, the upcoming Qatar World Cup is expected to serve as a notable sales catalyst. With Nike (NKE) as the “gorilla” in the industry, Dadhania expects the company to be the key beneficiary of these trends, especially as China sales “show early signs of promise,” in his view.
“We are confident in NIKE’s ability to return to double digit revenue growth in Greater China, supported in part by new suite of China specific apps in FY23, strong product and brand momentum, and easing base of comparison from 2H23,” Dadhania said. “From a margin perspective, this should enable healthy operating leverage and margin recovery.”
As such, Dadhania initiated the stock with an “Outperform” rating on the stock with a $125 price target. Nike (NKE) shares rose modestly in premarket trading on Thursday.
Wedbush analysts reduced their Q1 2023 earnings per share (EPS) estimates for shares of NIKE in a research note issued on Friday, September 9th. Wedbush analyst T. Nikic now anticipates NKE will earn $0.89 per share for the quarter, down from their prior estimate of $0.95. Wedbush also issued estimates for NIKE’s Q2 2023 earnings at $0.68 EPS, Q4 2023 earnings at $1.00 EPS, FY2023 earnings at $3.50 EPS and FY2024 earnings at $4.04 EPS.
Morgan Stanley analysts in a note noted Nike’s long-term potential, despite a rough macroeconomic environment, supply chain issues, problems in Greater China and a potential recession threat.
“While the long-term opportunity remains compelling, macroeconomic deterioration and limited visibility makes current discounted valuation fair, in our view,” the note read. “And until visibility improves, we see more attractive opportunities elsewhere in our coverage.”
Williams Trading Analyst Sam Poser noted sales and shipments of the company’s Jordan brand and Air Force 1 product have improved, overall visibility is still murky.
“Trends in China remain uncertain due to ongoing pandemic-related lockdowns, foreign exchange headwinds are worsening, and a shipment bottleneck is likely as late shipments and current shipments arrive at the same time,” Poser wrote in a Sept. 20 note to clients in which he gave Nike a “Hold” rating.
Given these headwinds, Poser said it is possible that Nike will need to implement a more robust promotional strategy through the year, though it is unclear if Nike will need to shift its wholesale distribution strategy.
BI ESG Senior Analyst Gail Glazerman said Nike, along with Levi Strauss and Lululemon, is leading a push to cut water usage by as much as 50% by 2025 as scarcity and supply-chain risks are leading them to use other fibers including hemp and flax, according to Bloomberg Intelligence. Cotton is water-intensive, and about half of the world’s crop will be exposed to drought by 2040. Simply switching to new materials may not be enough, however, as other companies are also shifting to recycled or greener materials and offering repairs and resale items
Nike Fiscal Q4 Earnings Recap
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
- 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 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.
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.
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).
Live From The Pit