Nike Inc. (NKE, Financial) reported better-than-anticipated earnings and sales on Monday, but problems remain.
On Monday, the Beaverton, Oregon-based company reported financial results for its fiscal third quarter of 2022, which ended Feb. 28. Third-quarter revenue was $10.9 billion, up 5% compared to prior year and up 8% on a currency-neutral basis. Nike Direct sales were $4.6 billion, up 15% on a reported basis and up 17% on a currency-neutral basis. Nike Brand Digital sales increased 19%, or 22% on a currency-neutral basis, led by 33% growth in North America. The gross margin increased 100 basis points to 46.6%. Diluted earnings per share for the quarter were 87 cents.
In a statement, Nike President and CEO John Donahoe emphasized the strong quarterly results “show that our Consumer Direct Acceleration strategy is working, as we invest to achieve our growth opportunities."
"Fueled by deep consumer connections, compelling product innovation and an expanding digital advantage, we have the right playbook to navigate volatility and create value through our relentless drive to serve the future of sport,” he said.
Despite the strong results, Nike stock dipped by 0.8% on Monday. Bloomberg reported that due to operating in "an industry pressured by soaring inflation, Nike Inc. is suffering more than most as its exposure to the fallout from the war in Ukraine and supply-chain issues put its shares on track for their worst quarter since 2008.”
The stock is down around 20% so far this year as decades-high inflation has hurt shoppers’ sentiment and wallets.
Shares shortly after noon on Tuesday stood at $133.77, a gain of $3.58 or 2.75%.
Management said on Monday that manufacturing problems that had been impacting sales for more than half a year were receding, allowing the company to take advantage of increasing demand for sports shoes and clothing. Pandemic-related factory closures during calendar 2021 in Vietnam, which makes approximately half of Nike's footwear, as well as a slower-than-hoped for return to normal production has led to product shortages.
In a note, Morgan Stanley analyst Kimberly Greenberger wrote, “It’s unlikely 3Q results resolve these lingering debates, delaying any material valuation re-rating to the 4Q earnings report (in June) or beyond.” Bloomberg also reported that Bank of America Securities analyst Lorraine Hutchinson has dropped Nike’s earnings per share estimates for fiscal 2022 and 2023 as a result of the troubles in eastern Europe and China’s ongoing Covid-19 dilemma.
Third-quarter revenue for the leading designer, marketer and distributor of authentic athletic footwear, apparel, equipment and accessories for a wide variety of sports and fitness activities increased 8% on a currency-neutral basis, led by Nike Direct growth of 17%. The Nike Brand Digital business recorded an increase of 22%, driven by double-digit growth in the North America, Asia-Pacific Latin America and Europe, Middle East and Africa regions, partially offset by declines in China.
Further contributing to Nike Direct growth was the steady normalization of traffic in owned physical retail, with Nike-owned stores up 14%, according to executives. Wholesale revenue declined 1% on a reported basis and were up 1% on a currency-neutral basis, with growth in EMEA and APLA offset by declines in North America and China.
“Our third-quarter results demonstrate Nike’s ability to navigate through volatility, while continuing to serve consumers directly and digitally, at scale,” Executive Vice President and Chief Financial Officer Matt Friend said. “Marketplace demand continues to significantly exceed available inventory supply, with a healthy pull market across our geographies.”
Revenue for the Nike Brand was $10.3 billion, up 8% compared to the prior year on a currency-neutral basis, led by 13% growth in EMEA. Revenue for Nike’s Converse brand was $567 million, down 1% on a reported basis and up 2% on a currency-neutral basis, led by strong performance in North America and Europe, but partially offset by declines in Asia.
Nike also said selling and administrative expenses increased 13% to $3.4 billion. Demand creation expense of $854 million grew 20% primarily due to normalization of spend against brand campaigns and continued investments in digital marketing to support heightened digital demand.
