Interactive Investor

ii view: profits beat proves Nike can do better

Shares for this sporting goods giant are down year-to-date compared to gains for wider US indexes. Buy, sell, or hold?

29th September 2023 11:42

by Keith Bowman from interactive investor

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First-quarter results to 31 August

  • Revenue up 2% year-over-year to $12.9 billion
  • Earnings up 1% to $0.94 per share
  • Share buybacks of $1.1 billion

Chief executive John Donahoe said:

“Q1 offered proof of what Nike can deliver when we connect great innovation, great storytelling and great marketplace experiences to consumers. Moving forward, we are laser-focused on scaling these successes with greater consistency and speed as we continue to integrate and streamline our business. This is how we’ll extend our leadership position and drive growth over the long-term.”

ii round-up:

Sports footwear and clothing maker Nike Inc Class B (NYSE:NKE) detailed earnings which beat Wall Street hopes as it also reiterated full-year sales and profit estimates. 

First-quarter earnings of $0.94 per share was up 1% year-over-year, surpassing analyst forecasts for nearer to $0.76 and aided by factors including higher product prices and below forecast cost rises.  

Shares in the Dow Jones company gained around 8% in after-hours US trading having come into this latest news down by close to a quarter year-to-date. That’s in contrast to gain of 2% for the Dow Jones index itself, while shares in UK listed JD Sports Fashion (LSE:JD.) are up over a tenth in 2023. 

Nike sells to its customers both directly via its own stores and online and indirectly via its wholesale division supplying retailers such as Dick's Sporting Goods Inc (NYSE:DKS), Foot Locker Inc (NYSE:FL), and JD Sports. 

Overall group sales, also helped by product price rises, increased by 2% year-over-year to $12.9 billion. Higher margin Direct sales rose 2%, while Wholesale revenues stayed flat at $7 billion.

On a regional basis, Nike branded sales rose everywhere apart from its home North American market where they fell 2% to $5.4 billion. Sales at its Converse brand retreated 9% to $588 million. 

Despite a marginal fall in profit margin to 44.2% during this latest quarter, management continues to target an improvement of between 1.4% and 1.6% over the year ahead. 

Nike returned approximately $1.7 billion to shareholders during the quarter to the end of August including $1.1 billion via share buybacks. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results, flagging a $126 per share estimate of fair value. Second-quarter results are likely to be announced mid to late December. 

ii view:

Employing over 80,000 people, Nike 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 just over a quarter and equipment the balance. North America generates its biggest slug of sales at around two-fifths, followed by Europe, the Middle East and Africa at just over a quarter, China at around 15% and Asia and Latin America the balance.  

For investors, heightened interest rates are likely to be having some dampening impact on customer spending. A resumption of student loan payments in the US is now pending and could hinder demand. Costs broadly for businesses remain elevated, relations between the West and its major market China remain strained, while environmental considerations for the wider fashion industry should not be ignored. 

On the upside, there has been some easing in costs headwinds such as freight charges, and Nike has strong product and geographical diversity. A multichannel sales approach continues to be pursued, while shareholder returns remain a focus, with the dividend payment having been increased for more than 20 consecutive years. 

All of Nike's share price gains over the past year have been wiped out since May and, despite the strong reaction to these results, the stock remains near a one-year low. It's last profits update in June was disappointing and there remain concerns around discretionary spending, especially in North America. With a lot of bad news already factored into the share price, Nike remains of interest to investors seeking diversity and exposure to a strong global brand.

Positives: 

  • Product and geographical diversity
  • Ongoing shareholder returns

Negatives:

  • Uncertain economic outlook
  • Subject to currency moves

The average rating of stock market analysts:

Buy

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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