Nike Stock Surges As Inventory Challenges Improve

Nike Inc. (NYSE:NKE) reported better-than-feared results to send its shares soaring in Friday trading. The company’s profit figures exceeded low expectations, mostly driven by margin improvements. Nike also reaffirmed its guidance for the full fiscal year.

Analysts are likely to view these results as favorable, especially in light of prevailing negative investor sentiment. This is particularly important for the bottom line, which came in better than initially feared, indicating the resilience and strength of Nike's brand worldwide.

How Nike Performed in FQ1

Nike said its revenue popped 2% year-over-year to $12.94 billion, slightly below the expected revenue increase to $12.99 billion. On the bottom line, earnings per share of 94 cents crushed the analyst expectations for just a 75 cents per share profit.

Region-wise, North America revenue came in at $5.42 billion, down 1.6% YoY, slightly below the estimate of $5.43 billion. EMEA (Europe, Middle East, and Africa) revenue was $3.61 billion, up 8.3% YoY, and above the estimate of $3.48 billion.

Greater China revenue was up 4.8% YoY to $1.74 billion, but missing the estimate of $1.83 billion. Nike has been experiencing headwinds in this region due to the slower-than-expected recovery in the post-Covid era. During the previous quarter to May 31, Nike saw China sales rise 16% YoY.

“We feel good about the market there and our position. Frankly, a couple things stand out. One, sport is back in China, you can just feel it, and that gives us great confidence about the future and the Chinese consumer in our segment, regardless of the macroeconomic outlook there,” commented John Donahoe, President CEO of NIKE.

Finally, Asia Pacific Latin America revenue came in at $1.57 billion, somewhat in line with the estimate of $1.59 billion.

North America continues to be the backbone of Nike’s business with the company generating $1.43 billion in EBIT from this region. This is followed by $930 million in EMEA EBIT, $525 million in China, as well as $414 million from the region of Asia Pacific Latin America.

Breaking down revenue by sectors, Nike’s Converse brand underperformed with revenue amounting to $588 million, marking an 8.6% decline compared to the previous year, and well below the estimated $649.2 million.

“Moving forward, we are laser-focused on scaling these successes with greater consistency and speed as we continue to integrate and streamline our business,” the chief executive added.

Equipment revenue displayed solid growth, reaching $531 million, which is an increase of 9.3% YoY and above the consensus of $496 million. Nike said it generated $8.42 billion from footwear product sales, up 3.8% YoY. On the other hand, apparel sales declined 1.3% to $3.39 billion, trailing analyst views of $3.47 billion.

Nike's results, which were better than expected, drove shares approximately 8% higher. This created an avenue for investors to speculate on potential further movements in Nike's stock price via some of the leading binary options brokers. This is a notable increase compared to the options market, which was implying a move of around +/-6%, aligning with the historical average. As of Thursday’s close, Nike shares had experienced a year-to-date decline of as much as 23.4%.

Margins and Inventory Drive Outperformance

One of the biggest positives in the quarter were margins and inventory. The gross margin contracted just 10 basis points YoY to 44.2%, while analysts were looking for a contraction of 60 bps. Even more positively, inventory levels fell 10% on an annual basis to $8.7 billion.

“Our first-quarter results demonstrated the impact of staying on the offense over the past fiscal year. With a healthy marketplace and another quarter of brand and business momentum, we are strengthening our foundation for sustainable, profitable, long-term growth,” said Matthew Friend, Executive Vice President Chief Financial Officer.

On the earnings call, the company reiterated its full-year guidance of revenue growth in the mid-single digits and gross margin expansion of 1.4 to 1.6 percentage points.

“We’re closely monitoring the operating environment, including foreign currency exchange rates, consumer demand over the holiday season, and our second half wholesale order book,” Friend said.

“We are cautiously planning for modest markdown improvements for the balance of the year, given the promotional environment,” he added.

Heading into the quarter, Nike's performance in the Chinese market has been of particular interest to investors. Similarly, the company’s relationships with wholesale partners, and the potential impact of the resumption of student loan payments on sales are also factors that are likely to shape the price movements in Nike stock going forward.

Nike managed to deliver on the margins after facing challenges such as bloated inventories, increased promotions, and supply chain disruptions, which have contributed to lower profits in recent quarters.

Investors were also eager to see how Nike’s direct-to-consumer (DTC) business is performing. The business saw its revenue rise 6% compared to the prior year. In June, Nike said it observed a shift in consumer behavior, as shoppers began favoring physical stores over digital channels.

This shift indicates a trend towards returning to pre-pandemic shopping habits, which is a significant development for the company, but also for the wider retail sector. Nike is adamant that its DTC business will represent a key growth driver going forward.

“While the ultimate landing spot of digital and direct isn’t as clear, we do believe we’re going to be a more direct and a more digital company, and a more profitable company,” Friend added.

Nike ended the quarter with $6.18 billion in cash and cash equivalents $6.18 billion, down 15% YoY. During the first quarter, Nike delivered approximately $1.7 billion in returns to its shareholders.

This included dividends totaling $524 million, which marked a 9% YoY increase from the previous year. Furthermore, the company executed share repurchases amounting to $1.1 billion, therefore retiring 10.5 million shares.

This share buyback initiative is part of Nike’s four-year, $18 billion program, which was approved by the Board of Directors in June 2022. As of August 31, the company has repurchased a total of 54 million shares under this program, amounting to approximately $5.9 billion.

Summary

Nike delivered a better-than-feared set of results for its first fiscal quarter. Shares were seen trading higher on the back of the improvements in margins and inventory, despite the slower-than-expected recovery in China.

Source valuewalk