ii view: why Nike shares are flying high

It’s been a tough year for this icon of the sporting industry. We assess prospects.

Second-quarter results to 30 November

• Revenue up 17% to $13.3 billion
• Earnings up 2% to $0.85 per share
• Dividend up 10% to $0.34 per share
• Share buybacks of $1.6 billion

Chief executive John Donahoe said:

"Nike’s results this quarter are a testament to our deep connection with consumers. Our growth was broad-based and was driven by our expanding digital leadership and brand strength. These results give us confidence in delivering the year as our competitive advantages continue to fuel our momentum."

ii round-up:

Sports clothing and footwear maker Nike Inc Class B (NYSE:NKE) has detailed quarterly earnings which beat Wall Street estimates as it continued to build on its direct and digital sales.

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Second-quarter revenue rose 17% to $13.3 billion, helping push earnings up 2% to $0.85 per share, despite a fall in margins and an increase in costs given higher product markdowns and increased advertising spend. 

Nike shares rose by more than 10% in after-hours US trading having come into this latest announcement down by just over a third year-to-date. Shares for both arch-rival adidas AG (XETRA:ADS) and sports fashion retailer JD Sports Fashion (LSE:JD.) have each about halved during 2022, while the broad S&P 500 index is down by close to a fifth. 

Nike’s direct sales to customers rose 16% to $5.4 billion during the quarter to the end of November, including record growth for its customer digital membership platform offering special deals, while wholesale sales climbed by nearly a fifth. 

Stock held, or inventories, rose by just over two-fifths year-over-year to $9.3 billion, generating a need for product price markdowns that caused a 3% decline in profit margin, although that was down from the previous quarter’s $9.7 billion of inventories. 

Nike upped its full-year earnings per share forecast by 4%, with broker Morgan Stanley reiterating its 'overweight' stance on the shares post the results. 

ii view:

Nike is a designer, distributor and retailer of athletic footwear, apparel, equipment and accessories for a wide variety of sports and fitness activities. Headquartered near Beaverton, Oregon in the USA, its brands include Nike itself, and Converse, a wholly owned subsidiary.  

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North America remains its biggest market, generating around 40% of sales, followed by Europe and the Middle East at around a quarter, and China at around 14%. Asia Pacific and Latin America generate the balance. Both dividends and share buybacks currently contribute to shareholder returns. 

For investors, a cost-of-living crisis globally continues to raise questions over consumer appetite for discretionary items such as sporting fashion wear. As with businesses generally, rising costs also offer a headwind, while Nike’s exposure to Covid challenged China warrants further consideration. 

On the upside, the strength of its brand and diversity in both product and geographical region remain central to the investment case. A growing direct relationship with its customers, potentially removing retailers and raising its profit margin, is not to be overlooked. Shareholder returns also remain a focus, with Nike previously launching a new four-year $18 billion share buyback programme. 

On balance, and while some room for caution persists, the strength of brand and sales, plus a consensus analyst estimate of fair value at over $115 per share, makes Nike a popular choice for investors wanting exposure in this sector. 

Positives: 

• Growing online sales
• Ongoing shareholder returns

Negatives:

• Uncertain economic outlook
• Elevated costs

The average rating of stock market analysts:

Buy