- Third quarter earnings beat estimates
- But China sales weak
- Excess inventory creates margin pressure
Shares in Nike (NKE:NYSE) cheapened 1.7% to $123.5 in after-hours trading on Wall Street despite the world’s largest sportswear company sprinting in with forecast-beating third quarter sales and earnings.
However, investors were left disappointed as hopes for a strong rebound in China sales were dashed, while higher markdowns to shift Nike’s bloated inventory pressured margins.
Q3 EARNINGS BEAT
For the holiday quarter ended 28 February 2023, the sneakers-to-soccer balls behemoth’s sales rose 14% year-on-year to $12.4 billion, above the $11.5 billion analysts were looking for, while earnings per share of 79 cents beat estimates of 55 cents.
Based on these strong third quarter results, the Oregon-based business famed for its iconic swoosh logo now expects full year 2023 revenue to grow in the high-single digit range, up from previous guidance of mid-single digit growth.
ROCKY ROAD TO RECOVERY IN CHINA
There was disappointment as Nike reported an 8% drop in Greater China revenues to $1.99 billion despite the vast Asian nations’ recent release from lockdown restrictions after three years of Covid curbs.
Sales in China, Nike’s third biggest market by revenue and a vast market for consumption, have proved soft with consumers not yet back to pre-pandemic shopping levels.
But there was much better news beyond China as Nike delivered double-digit sales growth in North America, as well as in the Europe, Middle East and Africa (EMEA) and Asia Pacific and Latin America (APLA) regions.
Gross margin decreased 330 basis points to 43.3% due to higher costs and aggressive promotions needed to reduce Nike’s bloated inventory of $8.9 billion, up 16% versus the prior year.
WHAT DID MANAGEMENT SAY?
‘Nike’s strong results in the third quarter offer continued proof of the success of our Consumer Direct Acceleration strategy,’ insisted CEO John Donahoe.
‘Fuelled by compelling product innovation, deep relationships with consumers and a digital advantage that fuels brand momentum, our proven playbook allows us to navigate volatility as we create value and drive long-term growth.’
Meanwhile, finance director Matthew Friend said Nike has ‘made tremendous progress on inventory as we position Nike for sustainable and more profitable growth.’
THE EXPERT’S VIEW
AJ Bell investment director Russ Mould explained that while quarterly earnings were better than expected, inventories ‘still look high which means the company is having to slash prices to clear stockpiles. That’s evident in a drop in margins.
‘Perhaps more disappointing was the rate of sales growth in China. Hopes were high that Chinese consumers would splash the cash as the country relaxed its Covid containment measures, enabling people to move more freely and to start to enjoy life as they used to know it.’
Mould added: ‘Equipment sales were in sharp decline, apparel was also weak, while footwear sales growth wasn’t a patch on the levels seen in other parts of the world. One could give Nike a break given this is only a short trading period, yet if China sales don’t pick up dramatically in its fourth quarter the market will not be happy.
‘A lot of people expected China’s consumer spending to rocket the second the government announced the relaxing of Covid rules. It seems logical to expect a more gradual recovery.’
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.
