ii view: Nike numbers beat forecasts but running into headwind

Shares in this sporting icon raced backwards 30% in 2022 but are up around 5% so far this year. Buy, sell, or hold?

Third-quarter results to 28 February

• Revenue up 14% to $12.4 billion
• Earnings down 9% to $0.79 per share
• Share buybacks of $1.5 billion

Chief executive John Donahoe said:

"Nike’s strong results in the third quarter offer continued proof of the success of our Consumer Direct Acceleration strategy. Fuelled 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."

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ii round-up:

Sports clothing and trainers giant Nike Inc Class B (NYSE:NKE) detailed quarterly earnings which beat Wall Street forecasts as it stayed focused on growing its direct and digital sales to consumers.

Third-quarter revenue to the end of February rose 14% to $12.4 billion, exceeding analyst estimates for nearer to $11.5 billion. Earnings of $0.79 per share also surpassed forecasts for $0.55 per share, but fell 9% year-over-year given ongoing product price markdowns needed to reduce stock levels following supply chain disruption.

The Dow Jones company's shares dropped by 2% in early US trading post the results having come into this latest news down by 5% over the last year. That’s similar to the Dow Jones index itself, although better than the 13% retreat for the broader S&P 500 index. Shares in high fashion retailer JD Sports Fashion (LSE:JD.) are up 12% over the last year. 

Nike’s direct sales climbed 17% to $5.3 billion in the period, with digital related sales up a fifth. Sales of its Converse brand improved 8% to $612 million. 

Stock, or inventory levels came in at $8.9 billion, up 16% year-over-year, although down from the previous quarter's $9.3 billion. Product price markdowns and additional marketing spend pushed its gross profit margin down 3.3% to 43.3%. 

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Geographically, a 27% increase in North American sales to $4.9 billion helped counter an 8% fall in China revenues to $2 billion. 

Nike returned approximately $2 billion to shareholders during the quarter. A dividend payment of $0.34 per share added to a $1.5 billion share buyback. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results. 

ii view:

Started in 1964, Nike today employs over 75,000 people. It 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 almost 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, a highly uncertain economic outlook, including higher interest rates and a consumer cost-of-living crisis continue to overshadow discretionary spending such as that for sporting fashion wear. Costs for businesses generally remain elevated, relations between the West and its major market China remain strained, while environmental considerations for the wider fashion industry persist. 

On the upside, the strength of its brand and diversity in both product and geographical region remain central. A growing direct relationship with its customers, potentially removing retailers and raising its profit margin, is not to be overlooked, while shareholder returns remain a focus with the dividend having been increased 21 years in a row.  

In all, and while some caution still looks sensible, investors will likely remain attracted to this strong and well managed global brand with growing sales. 

Positives: 

• Growing direct to consumer sales
• Ongoing shareholder returns

Negatives:

• Uncertain economic outlook
• Elevated costs

The average rating of stock market analysts:

Buy