Nike (NKE) Q2 Results 2023

Nike's gross margins will improve early next year, says BMO's Simeon Siegel

Nike released quarterly results on Tuesday that far exceeded Wall Street expectations while raising its outlook as the company announced its success in destocking its massive inventory.

Nike shares are up more than 10% after the close on Tuesday.

Here’s how Nike performed in its fiscal second quarter versus Wall Street expectations, based on a poll of analysts by Refinitiv:

  • Earnings per share: 85 cents vs. 64 cents expected
  • Revenue: $13.32 trillion vs. $12.57 trillion expected

The company reported net income of $1.33 billion, or 85 cents a share, for the three-month period ended November 30, compared to $1.34 billion, or 83 cents a share, a year earlier.

Nike reported revenue of $13.32 billion, up 17% from $11.36 billion a year earlier.

Considering the strong performance, Matt Friend, Nike’s chief financial officer, said on a conference call that the company now expects full-year sales growth.

For the past three quarters, Nike has beaten Wall Street expectations but, like other retailers, has struggled with overstocking resulting from supply chain disruptions, rising consumer demand, and unpredictable delivery times.

Inventories rose 43% year over year to $9.3 billion in the quarter. The merchandise glut prompted aggressive discounting, which helped push Nike’s gross margin down to 42.9% from 45.9% a year earlier. Inventories, however, declined from $9.7 billion in the previous quarter. Nike CEO John Donahoe said he believes the company has already passed its inventory peak. Gross margins are expected to decline two percentage points to 2.5 percentage points in the next quarter as liquidation efforts continue, Friend said.

The company also saw SG&A expenses rise 10% year over year to $4.1 billion, primarily due to advertising and marketing expenses and investments in Nike Direct as the company continues to move away from wholesalers. The company expects these costs to continue to increase in the high single digits in the next quarter.

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While the focus on Nike Direct was largely responsible for the increased administrative burden, the investment has paid off. Nike Direct sales rose 16% to $5.4 billion for the quarter, and digital sales were up 25%. Nike executives cited the record growth of the brand’s digital membership platform as the “key reason” for the surge in online sales. Shoppers who became members were able to take advantage of several Black Friday and Cyber ​​Monday promotions.

In recent quarters, wholesale sales were virtually flat, but grew 19% in the quarter. Nike executives said sales to wholesalers were stronger during the quarter because they finally had the inventory available to sell to them after supply chain constraints.

Nike’s sales in China, its third-biggest market by revenue, fell 3% year over year, continuing a trend the retailer has been struggling with as the country grapples with ongoing Covid lockdowns and a slowdown in retail spending has to fight. According to the National Bureau of Statistics of China, retail sales in the country fell 5.9% year on year in November, and sales of clothing and shoes plunged 15.6%.

After Nike’s fiscal first-quarter earnings were released in September, executives said the company’s inventories grew 65% last year in North America alone, and as a result, the company enacted an aggressive promotional strategy to promote the goods to liquidate and make room for new products.

The plan was an important part of Nike’s strategy to shift its sales directly to consumers and away from wholesalers by enhancing the in-store shopping experience and enticing customers to shop online directly from the company.

On Friday, Nike announced its new Jordan World of Flight Milan store on Via Torino, a famous shopping district in Italy known for its designer shoe stores.

The initiative reflects steps Nike is taking to grow the company as a direct-to-consumer brand.

The store, described by the company in a press release as a “unique retail experience,” will feature an integrated members’ lounge and will feature interactive shopping experiences tailored for fans of the acclaimed sneaker brand.

Read the company’s earnings announcement here.

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