Nike Stock Falls after Mixed Q3 Earnings: Key Takeaways

Nike stock (NYSE: NKE) is trading lower in US premarket price action today after it reported mixed earnings for the fiscal third quarter of 2023. Here are the key takeaways from the report.

Nike reported revenues of $12.4 billion in the quarter that ended in February. Its sales rose 14% YoY despite a 5% hit from adverse currency movements. Also, the sales were ahead of the $11.47 billion that analysts were expecting.

The company’s revenues have surpassed analysts’ estimates over the last four consecutive quarters. In the fiscal second quarter, it reported a spectacular beat on both the topline as well as the bottomline and the stock soared after the earnings release.

Looking at the different sales channels, Nike’s Wholesale revenues increased 12% while Direct sales rose 17% to $5.3 billion. Its online sales soared 20% in the quarter.

Over the last couple of years, Nike has been aggressively focusing on online sales while lowering its reliance on wholesale sales which are invariably low margins.

In his prepared remarks, Nike CEO John Donahoe said, “NIKE’s strong results in the third quarter offer continued proof of the success of our Consumer Direct Acceleration strategy.”

Nike Reported Better Than Expected Earnings for the Fiscal Third Quarter

Nike’s EPS of 79 cents surpassed analysts’ estimate of 55 cents. However, the company’s gross margins contracted 330 basis points to 43.3%.

The company said that the fall in gross margins was “primarily due to higher markdowns to liquidate inventory; continued unfavorable changes in net foreign currency exchange rates; higher product input costs and elevated freight and logistics costs.”

Notably, many other retail companies have marked down their inventory. Amid strong demand and supply chain issues, retail companies added excess inventory to their balance sheets in 2021 and 2022.

Now as demand growth has slowed down, they find themselves saddled with excess inventory, some of which they have been selling at deep discounts.

At the end of February, Nike had $8.9 billion in inventories which is 16% higher as compared to the corresponding quarter last year. The inventory meanwhile fell as compared to the fiscal second quarter where the sneaker giant had $9.3 billion in inventory.

During the fiscal second-quarter earnings call, Nike said that “We believe the inventory peak is behind us as actions we’re taking in the marketplace are working.”

The company added that the composition of inventory is improving and its apparel inventory units and apparel closeout unit in North America are down sharply.”

• Read our guide on buying Nike stock

NKE Expects Inventory to Fall Further

Nike expressed optimism that it would be able to tide over the excess inventory.

During the fiscal third-quarter earnings call, CFO Matthew Friend said, “With strong traffic and retail sales growth and reduced inventory buys for the spring and summer seasons, we are increasingly confident that we will exit the year with healthy inventories across the marketplace.”

As has been the case for the last few quarters, China continues to be the weak spot for Nike. In the fiscal third quarter, its sales in Greater China fell 8% to $1.99 billion and trailed analysts’ estimate of $2.09 billion.

The company is meanwhile optimistic about the recovery in China– its third largest market. It said that sales improved in the region after the country ended its zero-COVID policy and added that its inventories in the region “are in a good shape.”

Responding to an analyst’s question on China, Donahoe said, “the fundamentals of this market are good, right? It is a very large market that’s growing. Sport and wellness is a key trend and tailwind there. There’s a desire for innovation and style.”

He added, “And the key to winning in this market is simply put: having great innovation and connecting with Chinese consumers in a locally relevant way.”

Nike Stock is Slightly Lower after Releasing Q3 Earnings

Nike stock is trading around 1% lower in premarkets despite the earnings and revenue beat as markets seem concerned with the China slowdown and gross margin contraction.

Meanwhile, in the long term, Nike sees the metaverse as a major opportunity and already has a presence on the metaverse. Companies like Nvidia also see the metaverse as a key growth driver. There is a list of stocks that are a play on metaverse.

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