Nike Beats Earnings Expectations but Investors Seem Far From Impressed

Nike (NYSE:NKE) topped expectations for earnings and revenue in fiscal Q3 2023, however, the company’s bloated inventory yielded a muted reaction in shares.

The apparel giant’s shares were trading modestly lower on Wednesday, after closing the Tuesday’s trading session up 3.6%.

Nike reported earnings per share (EPS) of 79 cents in the holiday quarter, beating the consensus projection of 55 cents. Net income stood at $1.2 billion at the end of the quarter, down from $1.4 billion, or 87c per share, in the year-ago period. Revenue came in at $12.39 billion, up from $10.87 billion a year ago, and above the analysts’ estimates of $11.47 billion.

Excess Inventory Continues to Create Headwinds

Nike said its gross margin contracted by 330 basis points to 43.3% in the three-month period due to a greater number of markdowns and promotions the company used to reduce its swollen inventory. The company’s inventory grew by 16% from a year ago at $8.9 billion, mainly due to higher product input and freight expenses.

Like its peers, Nike has been grappling with bloated inventory levels caused by supply chain constraints and inconsistent consumer demands, pressuring the company’s margins. Nike executives told investors during the earnings call they feel confident that the company will finish fiscal 2023 with healthy inventory levels, adding they expect an “even leaner inventory” than previously anticipated thanks to improved sales.

“Our decisive actions are enabling us to navigate through shifting dynamics with continued improved efficiency. These results demonstrate yet again that we are on track to hit our FY23 priorities of getting inventory in a healthy position and delivering revenue consistent with the financial goals we set earlier in the year,” said President and CEO John Donahoe.

Nike’s boss also downplayed worries over the macroenvironment, saying the company is prepared for any scenario, though it remains particularly focused on getting stronger through this challenging period amid record-high inflation and economic risks.

China Sales Declining

Nike’s sales in China tumbled 8% during the latest quarter to $1.99 billion, even though the government scrapped its zero-Covid policy that had weighed on the company’s performance. The sales figure was below analysts’ estimates of $2.09 billion, according to StreetAccount.

The sales drop in China, Nike’s third-largest market by revenue, comes with sweeping lockdown restrictions and a resurgence in Covid-19 infections hindered consumer demand. While there has been some recovery in activity, demand levels are yet to hit pre-pandemic levels.

Still, Mr. Donahoe said the company feels optimistic about its momentum in the region, noting a significant growth acceleration in the second month of the holiday quarter after China ended its zero-Covid policy.

“The fundamentals of this market are good, right? It is a very large market that’s growing. Sport and wellness is a key trend and tailwind there. There’s a desire for innovation and style. And the key to winning in this market is simply put: having great innovation and connecting with Chinese consumers in a locally relevant way,” Donahoe said.

He said earlier this year the company is particularly focused on Gen Z consumers in China as the company continues to attract strong interest in the region, despite coronavirus-related constraints.

According to the company’s CEO, Nike remains “the number one cool and favorite brand in Shanghai and in Beijing,” stressing “a very good response” from Gen-Z buyers who pay more attention to globally-relevant brands and innovative products compared to regular consumers.

“We saw good response in Q2, and we have the same focus and outlook going forward,” he said back then.

During Nike’s fiscal Q2, when China’s zero-Covid policy was still in force, 1,500 of the company’s stores in the country were closed, resulting in a 3% sales decline in that quarter year-over-year. The company’s revenue in Q2 fell by 22% YOY.

Donahoe said Nike views China-related disruptions “as transitory,” adding the company still has confidence in the fundamentals of that region. He said Nike localized its iconic franchises such as Air Force One and Dunk to make them more relevant for Chinese shoppers, noting a brilliant response from local consumers.

In line with its broader efforts to appease Gen Z consumers, Nike launched a web3 platform dubbed “.SWOOSH.” last year, which is aimed at creating an inclusive digital community and onboarding Nike consumers interested in the Web3 space. The platform enables Nike Members to collect and co-create virtual creations in the form of digital collectibles like virtual shoes, jerseys, and other pieces of apparel.

Foot Locker Relationship ‘Renewed’

Earlier this week, footwear retailer Foot Locker (NYSE:FL) also reported financial results for the holiday quarter and issued a soft outlook for the current fiscal year. In addition, the retailer’s CEO Mary Dillon lauded Foot Locker’s “renewed” relationship with Nike, emphasizing the so-called “sneaker culture.”

As a result, shares of the retailer rose as investors were pleased to hear about the improving Nike relationship, given the importance of the latter for Foot Locker. Since taking the wheel at Foot Locker last year, Dillon said she spent a “great deal of time with Nike revitalizing our partnership” after the sportswear giant pivoted away from wholesale channels to focus on direct-to-consumer (DTC) sales.

Since then, the company has been investing heavily in its DTC strategy, but Donahoe said that wholesalers still remain incredibly important to Nike. He added that consumers in the sportswear and apparel industry have been very clear about their needs, demanding a top-notch and consistent shopping experience “regardless of channel,” he said.

In the previous quarter, Nike’s wholesale revenue jumped 19% despite its shift to DTC, mainly because the company had enough inventory to sell to wholesale partners.

Summary

Nike shares are trading a bit softer on Wednesday despite the company beating analyst estimates on the top and bottom lines. However, investors seem to be a bit underwhelmed by Nike’s success in working down its excess inventory.

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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.