Interactive Investor

ii view: costs and China overshadow Nike's results

28th June 2022 14:11

Keith Bowman from interactive investor

Shares in this US sporting goods giant are down by more than a third in 2022. We assess prospects. 

Fourth quarter results to 31 May

  • Revenue down 1% to $12.2 billion
  • Earnings down 3% to $0.90 per share
  • New four-year $18 billion share buyback programme

Chief executive John Donahoe said:

“Nike’s results this fiscal year are a testament to the unmatched strength of our brands and our deep connection with consumers. Our competitive advantages, including our pipeline of innovative product and expanding digital leadership, prove that our strategy is working as we create value through our relentless drive to serve the future of sport."

ii round-up:

Sports clothing and footwear maker Nike Inc Class B (NYSE:NKE) reported better-than-expected quarterly earnings despite battling both Covid lockdowns in China and greater cost pressures for US consumers. 

Fourth quarter earnings per share to the end of May came in at 90 US cents, topping Wall Street forecasts for nearer 80 cents per share. However, the figure was helped by tax changes, and Q4 operating profit actually missed consensus forecasts. Management's first quarter outlook comment also pointed to expectations for flat to marginally higher revenues year-over-year as the pandemic in China continues to impact. 

Nike shares fell around 3% in after-hours US trading having come into this latest update down around a third year-to-date. Shares for UK and overseas sporting goods retailer JD Sports Fashion (LSE:JD.) have fallen by more than 45% in that time. The S&P 500 index is down around 18% in 2022. 

Both provisions for unsold Chinese stock and higher freight and logistics costs pushed Nike’s profit margin down to 45% during the final quarter. Sales for the period fell 1% to $12.2 billion. 

For the full year, Nike revenues rose 5% to $46.7 billion, pushing earnings per share up 5% to $3.75 per share. Direct sales to consumers rose 14% to over $18 billion. It returned approximately $5.8 billion to shareholders over the year via both dividends and share buybacks. 

ii view:

Nike is a designer, distributor and retailer of athletic footwear, clothes, equipment and accessories for a wide variety of sports and fitness activities. It is headquartered near Beaverton, Oregon in the USA. Its brands include Nike itself, and Converse, a wholly-owned subsidiary brand. 

North America remains its biggest market, generating around 40% of sales. That’s followed by Europe and the Middle East at around 27%, China at around 16%, and Asia Pacific and Latin America the balance.

For investors, the ongoing pandemic in China cannot be overlooked. Elevated freight and logistics costs for industry generally continue to offer headwinds, while a consumer cost-of-living crisis almost globally raises questions over people's ability to spend on discretionary items such as sporting fashion wear.  

That said, direct sales to consumers continue to expand, adding to Nike's profit margin as it bypasses outside retailers. The world’s love affair with sport and its pool of superstars shows little sign of fading, while shareholder returns remain a management focus given its recent launch of a new four-year $18 billion share buyback programme. In all, and while there are clearly some hear-term problems, with the consensus analyst estimate of fair price currently standing at just over $150 per share, scope for longer-term optimism for this global brand looks to remain.

Positives: 

  • Growing online sales
  • Focus on shareholder returns

Negatives:

  • Uncertain economic outlook
  • Elevated costs

The average rating of stock market analysts:

Buy

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