- Nike delivers best sales growth in a decade
- CEO insists Nike is past inventory peak
- Sportswear retailers JD Sports and Frasers rise on news
Shares in JD Sports Fashion (JD.) jumped 7.1% to 121.25p on a positive read-across from forecast-beating second quarter results (20 December) from key supplier Nike (NKE:NYSE), as US shoppers stocked up on sportswear and trainers ahead of Christmas.
Sports Direct-owner Frasers (FRAS) was also lifted by the news, its shares marked up 2.8% to 742p, as investors anticipated festive sneaker sales could prove better than feared in the face of cost-of-living pressures.
WHY DID NIKE SHARES DASH HIGHER?
Nike shares rallied 13% to $116.7 in after-hours trading on Wall Street after sales and earnings smashed analysts’ estimates.
Revenue surged 17% higher year-on-year to $13.3 billion for the quarter ended 30 November, ahead of the $12.6 billion expected and representing Nike’s best quarterly revenue growth in a decade, boosted by increased promotions and deeper discounts to shift excess inventory.
Earnings per share (EPS) of 85 cents was comfortably ahead of the 64 cents Wall Street was looking for and the world’s largest sportswear company also raised its outlook, as management flagged progress clearing a chunky inventory pile that arose in large part due to supply chain disruptions.
PAST PEAK INVENTORY
At $9.3 billion, Nike’s inventories were still 43% higher compared with the prior year period, though aggressive discounts helped reduce the pile from $9.7 billion three months earlier.
There was relief as CEO John Donahoe insisted his charge is already past its inventory peak.
Nike’s gross margin decreased by 300 basis points to 42.9%, mainly due to higher markdowns to liquidate inventory, particularly in North America.
Donahoe said Nike’s quarterly results were ‘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.’
Sales in North America, Nike’s largest market, surged 30% higher while revenues in China, its third biggest market by sales, dropped by 3% compared to last year, continuing a trend the retailer has been contending with as China copes with lingering Covid lockdowns and a retail spending slowdown.
Nike Direct sales were up 16% for the quarter at $5.4 billion and digital sales were up 25%.
THE EXPERT’S VIEW
AJ Bell investment director Russ Mould said Nike may have had a tough time, but it remains ‘the dominant player in what is, with Adidas (ADS:ETR) trailing a little behind, a duopoly in the sportswear and trainers market.
‘The best quarterly revenue growth in a decade is testament to the brand’s inherent strengths. It may have had to ease up on pricing to clear some excess inventory but Nike’s ability to appeal across class and age demographics means wealthier clientele, less impacted by the cost-of-living crisis, have also helped to drive sales.
‘The improvement in the supply chain is crucial as Nike looks to get its products to the right customers at the right time and this should enable it to better manage its inventories and increase its margins.’
Mould continued: ‘There remain obstacles to clear in the short term, particularly in the important Chinese market where the fate of the country’s big reopening hangs in the balance thanks to mounting Covid infections.
‘However, Nike looks like it is stepping up to the plate and its continued shift towards selling more direct-to-consumer should give it greater control over its own destiny.’
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (James Crux) and the editor of the article (Tom Sieber) own shares in AJ Bell.
