Nike just reported good earnings in a tough business environment.
Nike’s (NKE -0.21%) fiscal third-quarter earnings report on Tuesday beat estimates for both the top and bottom lines, but that wasn’t enough to make the market happy.
Even though the stock was trading higher after hours on Tuesday, it was down 5% by the end of Wednesday’s session, mostly because investors were worried about its prospects for the current quarter. Even though the numbers weren’t perfect, the report should remind investors that the company is doing well after a tough year in 2022, and the stock still looks like a good buy for the long term.
After Nike’s most recent earnings report, here are three reasons why you should buy its stock right now.
People still want to buy
Nike’s costs went up because of a rise in inventory last year, but the Swoosh still has strong revenue growth, which reassures investors that there is still a lot of consumer demand for its products, even though most of the world is dealing with high inflation and the threat of a recession.
In the third quarter of the fiscal year, sales went up 14%, or 19%, when currency changes were taken into account. They reached $12.4 billion, which was well above the estimates of $11.5 billion.
Nike Direct sales went up by 17% to $5.3 billion, digital sales went up by 20%, and wholesale sales went up by 12%.
China continued to have trouble with COVID-19 lockdowns because of where it was, but every other region was strong. No matter what currency was used, sales went up 27% in North America, 26% in Europe, the Middle East, and Africa, and 15% in Asia, the Pacific, and Latin America. In China, it only went up by 1%. But it’s amazing that a company like Nike, which has been around for 50 years, is growing its sales by 26% to 27% in its core markets.
The success of products like Air Max, its NEXT% running platform, ZoomX, and the Lebron 20 was credited by management.
Unit growth for all of its products was 10%, which shows that demand is strong and prices are going up because of inflation.
Management said that consumer demand “remains remarkably strong,” which is very impressive given how the world economy is doing right now.
Stocks are getting back to normal
Nike, like a lot of retailers and consumer brands, has had trouble keeping up with its inventory levels over the past year. It ordered extra products in case supply chain delays kept happening, but those delays never happened.
But the company seems to have gotten it under control after a number of quarters of markdowns and other efforts to control the number of items in stock. In the third quarter, the company’s inventory went up 16% to $8.9 billion, which was about the same as its sales growth of 14%.
Markdowns did hurt the company’s bottom line. Gross margin went down by 330 basis points to 43.3%, and earnings per share (EPS) went down from $0.87 to $0.79. But that number was still better than the $0.55 that was expected.
Nike expected just flat to low-single-digit growth in reported revenue for the fourth quarter. This is because it cut back on inventory commitments in the spring and summer because of problems it had earlier. But this decision should help margins in the future, and investors should expect gross margins to rise steadily.
Nike is gaining market share over rivals
Adidas and Under Armour, two of Nike’s biggest competitors, have been losing ground over the past few years, but the last quarter shows how big Nike’s lead has grown.
Adidas’s revenue grew by only 1% in 2022, when adjusted for changes in currency, and it went down by 1% in the fourth quarter. This was partly because of the end of its Yeezy partnership with Kanye West.
Adidas only had a 3% operating margin for the whole year, and it lost 724 million euros in the fourth quarter. The company’s management thinks that performance will get worse in 2023 because it wants to cut its inventory, which was up 49% at the end of the year. It also called for a decline in revenue of one to ten percent, regardless of the value of the dollar, and for adjusted operating profits to be equal to zero.
On the other hand, Under Armour’s most recent quarter’s sales were only up 3%, or 7%, if you don’t count the effect of currency. Europe, the Middle East, and Africa drove that growth, while sales in North America, where most of its sales come from, went down by 2%. It has also had trouble in a promotional environment. In the last quarter, the gross margin dropped 650 basis points to 44.2%.
When restructuring costs from the same quarter last year are taken into account, operating income went down.
Based on these numbers, it’s clear that Nike isn’t the only sportswear stock with problems like excess inventory and markdowns. However, Nike is growing much faster than its two closest competitors, and given their problems, it looks like Nike will also gain more market share in 2023.