Even When Cautious, Nike Still Does It

In a weak and unstable macroeconomic climate, even Nike Inc NKE is struggling with bloated inventory and therefore, moving forward cautiously. Despite beating Wall Street’s expectations for its fiscal third-quarter earnings and revenue, the world's largest athletic apparel company struggled with softer than expected sales in China during the holiday quarter.

Third Fiscal Quarter

For the quarter that ended on February 28th, sales rose from last year’s $10.87 billion to $12.39 billion, easily topping the expected $11.47 billion. Net income rose from 1.4 billion, or 87 cents per share, a year earlier to $1.2 billion, or 79 cents per share, also exceeding the expected 55 cents. Selling and administrative expenses also rose 15% to $4 billion, largely as a consequence of wage-related expenses and direct-selling efforts.

Bloated Inventory Continued To Weigh On Margins 

All retailers, including Nike, had one single wish during the holidays and that was to liquidate excess inventory that resulted from supply chain disruptions and changing consumer preferences due to inflationary pressures. Quarter over quarter, Nike offloaded about $400 million in inventories with inventories up 16% compared to last year’s period at $8.9 billion that has been attributed to product input costs and freight expenses rose.

Over the last two quarters, Nike was relying on its partnerships with wholesalers to offload inventory with wholesale revenues rising12% in the quarter, following 19% growth during the previous quarter.

As a result of higher markdowns and promotions, gross margin fell to 43.3%, which translates to a decrease of 3.3 percentage points.

Sales In China Fell Short Of Expectations

Although China is on road to recovery, the sales rebound didn’t happen at Nike’s third-biggest market by revenue. Despite the end of the country’s zero-Covid policy.

Sales fell 8% during to $1.99 billion, while Street Account expected $2.09 billion.

When asked about its outlook on China’s recovery, Nike CEO John Donahoe said the company feels good about its momentum in the region with growth picking up the second month of the quarter after lockdowns ended.

Other Markets

Besides China, all markets experienced double-digit sales increases. North America saw sales rise 27% while Europe, Middle East and Africa saw revenue expand 17% compared to last year’s comparable quarter, followed by a 10% sales rise in Asia Pacific and Latin America.

Guidance

Fiscal year revenue is expected to grow by high single digits, as opposed to mid-single digit guidance given in the prior quarter. Gross margins are expected to decline by 2.5 percentage points, which is the low end of the previously given guidance range that reflects the company’s ongoing efforts to get rid of bloated inventory. Full year expenses are now expected to rise 10%. 

In the undergoing quarter, Nike expects flat to low single digit revenue growth. CFO Matthew Friend said the company is taking a “cautious approach” to planning, given the uncertainty about consumer confidence and the economy, assuring that the company is well equipped to handle this high level of volatility. 

The DTC Bet Is Paying Off

For the last several years, Nike has been pushing direct-to-consumer sales and has invested heavily to build this channel by building out experiential stores, developing its loyalty program and growing its e-commerce efforts. Nike Direct sales were up 17% to $5.3 billion while Nike digital sales jumped 20%. Digital sales made up 27% of sales.

Gender Neutral Collection

This summer, Nike wll be releasing its first ever gender-neutral athletic wear collection this summer. Sabrina Ionescu will be the newest member of its signature athlete family. 

Nikeland

During the earnings call, it was implied that this micro metaverse built on the Roblox Corporation RBLX platform will have a significant role in Nike’s marketing and branding strategy over the upcoming years. Nikeland has already become a benchmark for many other brands against which they can measure their own success in the digital universe. After all, artificial intelligence (AI), e-commerce, and in-store experiential technology have been integral to the Nike’s strategy for a while back.

Nike should end the fiscal year with healthy inventory levels 

Management is increasingly confident of seeing a “leaner inventory” than anticipated given sales momentum. With now four decades of celebrating Nike Air Max Day on March 26th, Nike is still on the forefront of transformation and it usually ends up ‘just doing’ what it envisions.