ii view: are Nike numbers a warning sign for global economy?

This sporting mammoth's shares are off the pace so far in 2023. Should we be worried? We assess prospects.

Fourth-quarter results to 31 May

• Revenue up 5% to $12.83 billion
• Earnings down 27% to $0.66 per share
• Share buybacks of $1.4 billion

Chief executive John Donahoe said:

“Nike’s strong results make clear that our strategy is working. FY23 was a milestone year for Nike as our unique advantages continue to drive competitive separation. Our investment in innovation and our digital leadership are fueling broad based growth across our portfolio of brands, as we create value by serving the future of sport.”

• Invest with ii: Most-traded US Stocks | Buy International Shares | Interactive investor Offers

ii round-up:

Sports footwear and clothing maker Nike Inc Class B (NYSE:NKE) detailed mixed quarterly results, with sales beating Wall Street hopes but earnings disappointing. 

Fourth quarter sales of $12.8 billion just beat analyst estimates for $12.6 billion, helped by China’s post pandemic reopening. But earnings of $0.66 per share fell short of the $0.68 expected by Wall Street, hindered by elevated freight and logistics costs and continued product promotional markdowns. 

The Dow Jones constituent retreated around 4% in post-market US trading having come into this latest news down 3% year-to-date. That compares to a 14% gain for global sporting goods retailer JD Sports Fashion (LSE:JD.) and a near 3% gain for the Dow Jones index itself. 

Nike’s China business led the way during the quarter, raising sales by 16% to $1.81 billion, far outpacing a 5% gain in its home North American market to $5.35 billion. 

Nike’s profit margin for the quarter fell 1.4% to 43.6% given elevated costs such as product raw materials. Quarterly earnings of $0.66 per share was down 27% year-over-year, with annual profit down 16% to $5.07 billion. 

Accompanying management outlook comments pointed to hopes for mid-single digit sales growth for the year ahead, with the profit margin expected to improve by around 1.5%.  But first-quarter revenue growth is only tipped to be flat to low-single digits. Analysts had been looking for a 5.8% increase.

Nike returned approximately $7.5 billion to shareholders over the full year, with a 10% hike in dividend payments to $2 billion coming alongside $5.5 billion of share buybacks. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results, although shaved its estimate of fair value to $127 per share from a previous $130. 

ii view:

Founded in 1964, Nike today designs, distributes, and sells sporting goods ranging from athletic footwear and clothes to equipment and accessories. Footwear generates its biggest slug of sales at around two-thirds, followed by clothes at around 30% and equipment the balance. North American remains its biggest market at around 44% of sales, followed by Europe, the Middle East and Africa at 28%, China at around 15% and Asia and Latin America the balance.  

For investors, elevated costs continue to hinder earnings and rising interest rates make for a tough consumer backdrop. Currency moves can impede performance, relations between the West and its major market China remain strained, while environmental considerations for the wider fashion industry persist. 

• Be cautious of ‘AI tech hype’ as seven US stocks dominate returns
• Merryn Somerset Webb: the scariest chart in the world
• Scottish Mortgage: our latest thinking on AI, Elon Musk and China

More favourably, cost headwinds more broadly have been easing. Product and geographical diversity prevail, its multichannel sales approach continues to be pursued, while shareholder returns remain a focus with the dividend having been increased since 2004.  

Fans of Nike stock won't be happy with the downbeat assessment of near-term prospects, and consumers do have plenty of opportunity to trade down to cheaper brands. However, Nike remains one of the world's strongest brands and, while the stock could come under pressure if economic conditions worsen, the company is well positioned to navigate headwinds in the months ahead.

Positives: 

• Product and geographical diversity
• Ongoing shareholder returns

Negatives:

• Uncertain economic outlook
• Elevated costs

The average rating of stock market analysts:

Buy