Shares of NIKE Inc. (NKE Quick QuoteNKE - Free Report) jumped more than 5%, following the impressive third-quarter fiscal 2022 results, wherein revenues and earnings beat the Zacks Consensus Estimate. Results reflect gains from its Consumer Direct Acceleration strategy, along with strong demand, compelling products, and robust performance in its digital and DTC businesses. Strength in the North America and Europe regions also remained upsides. However, ongoing industry-wide supply-chain disruptions led to the shortage of Nike, Jordan and Converse sneakers across the majority of markets.

Overall, shares of NKE have plunged 21.3% in the past three months compared with the industry’s decline of 19.6%.

Q3 Highlights

In the reported quarter, the company’s earnings per share of 87 cents decreased 3.3% from 90 cents reported in the year-ago quarter but the metric beat the Zacks Consensus Estimate of 73 cents.

Revenues of the Swoosh brand owner improved 5% year over year to $10,871 million and surpassed the Zacks Consensus Estimate of $10,583 million. On a currency-neutral basis, revenues grew 8% year over year, driven by growth in the EMEA region and the NIKE Direct business.

Sales at NIKE Direct were $4.6 billion, up 15% on a reported basis and 17% on a currency-neutral basis. The NIKE Direct business benefited from the steady normalization of the owned retail business. Revenues at owned stores increased 14%, driven by improved traffic.

The company continued to witness robust growth at the NIKE Brand’s Digital, led by double-digit growth in North America, EMEA and APLA, offset by a decline in Greater China. Digital revenues for the NIKE Brand were up 19% year over year on a reported basis. On a constant-currency (cc) basis, digital sales improved 22%, driven by 33% growth in North America.

However, wholesale revenues fell 1%, while the metric inched up 1% on a cc basis. This is mainly due to strength in the EMEA and APLA regions, which somewhat offset sluggishness in North America and Greater China.

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Operating Segments

The NIKE Brand revenues were $10,323 million, up 5.6% year over year on a reported basis. Revenues for the brand rose 8% on a constant-dollar basis. Strength in Europe, Middle East and Africa aided the results.

Within the NIKE brand, revenues in North America advanced 9% on both reported and currency-neutral basis to $3,822 million. North America revenues benefited from double-digit growth in men's running franchises like Pegasus and additional updates on franchises like the Winflo and Zoom Air.

Sales for the NIKE Direct business were up 27% in the region. Digital sales grew 33%, owing to double-digit growth in traffic, a rise in new members and improvements in member buying frequency. Sales at NIKE-owned stores accelerated 16% as traffic began to trend toward the pre-pandemic levels.

In EMEA, the company’s revenues rose 7% on a reported basis and 13% on a cc basis to $2,779 million. Growth was driven by improvements in full price realization and a decline in average markdown rates. The continuation of the Champions League tournament as well as the resumption of Team sports aided sales in this region. Also, continued strength in the Jordan brand across all consumer segments, led by women, remains an upside.

The NIKE Direct business improved 22% on a currency-neutral basis, driven by 44% growth at NIKE stores on improved traffic trends. The NIKE Digital business grew 11%, driven by member-only access, app-exclusive releases and double-digit growth in full-price demand. Also, revenues in the Wholesale channel rose 10%, owing to sturdy growth rates in strategic accounts.

In Greater China, revenues slumped 5% year over year on a reported basis and 8% on a cc basis in the fiscal third quarter to $2,160 million. However, the region witnessed a sequential improvement and continuous improvement in full price realization. The region generated $2 billion in revenues in the said quarter, driven by record weekly traffic. Robust sell-through across men's, women's, kids, along with strength in Jordan, acted as growth drivers.

NIKE Direct declined 11%, with soft revenues in both digital and owned stores. Revenues in owned stores fell 5%, whereas digital sales plunged 19% due to a delay in product launches due to the ongoing supply-chain disruptions.

In APLA, NIKE revenues advanced 11% on a reported basis and 19% on a cc basis to $1,461 million. Revenues gained from double-digit currency-neutral growth across all territories, including Korea, Mexico and SOCO. Strength in running, fitness, Jordan and Classics also aided quarterly growth. NIKE Direct advanced 39%, driven by a 61% surge in NIKE Digital. Also, NIKE-owned stores advanced 17%, while the wholesale channel grew 9%.

Revenues at the Converse brand fell 1% on a reported basis to $567 million. On a currency-neutral basis, revenues of the segment were up 2%, backed by strong growth across all channels in Europe and North America, somewhat offset by weakness in the Asia region.

Costs & Margins

The gross profit advanced 7% year over year to $5,067 million, while the gross margin expanded 100 basis points (bps) to 46.6%. Gross margin growth can be attributed to improved NIKE Direct margins, driven by lower markdowns, higher full-price sales mix and favorable currency rates, offset by lower full-price product margins, owing to escalated freight and logistics costs.

Selling and administrative expenses rose 13% to $3,438 million due to higher operating overhead and demand-creating expenses. As a percentage of sales, SG&A expenses expanded 220 bps to 31.6% from the prior-year quarter.

Demand-creation expenses increased 20% year over year to $854 million, owing to the normalization of spending at brand campaigns and sustained investments in digital marketing to facilitate the rising digital demand.

Operating overhead expenses were up 11% to $2.6 billion on higher wage-related expenses and increased technology investments to support digital transformation.

Balance Sheet & Shareholder-Friendly Moves

The Zacks Rank #3 (Hold) company ended third-quarter fiscal 2022 with cash and short-term investments of $13,467 million, up $12,528 million from the last year. It had long-term debt (excluding current maturities) of $9,418 million and shareholders’ equity of $14,809 million as of the end of the fiscal third quarter.

As of Feb 28, 2022, inventories of $7,700 million increased 15% from the prior-year levels due to elevated in-transit inventories. The delays are mainly related to the extended lead times due to the ongoing supply-chain disruptions, partly negated by strong consumer demand.

In third-quarter fiscal 2022, the company returned $1.7 billion to shareholders, including dividend payouts of $484 million and share repurchases of $1.2 billion. It completed the repurchase of 8.1 million shares in the reported quarter under its $15-million program approved in June 2018. As of Feb 28, it repurchased 68.9 million shares for $7.6 billion under the aforesaid program.

Outlook

Driven by the solid quarterly results, management expects fiscal 2022 revenues in the APLA region to grow in the mid-single digits. In the North American region, NKE forecasts year-over-year revenue decline for the fiscal fourth quarter, while it continues to expect a sequential improvement for Greater China.

For fiscal 2022, SG&A is anticipated to rise mid-teens in a bid to support the ongoing digital transformation. The effective tax rate is expected to be in the low teens in fiscal 2022. The gross margin is envisioned to expand at least 150 bps year over year, driven by solid demand, higher full-price realization, lower markdown and reduced customer return.

Stocks to Consider

Some better-ranked stocks from the same industry are Delta Apparel (DLA Quick QuoteDLA - Free Report) , Oxford Industries (OXM Quick QuoteOXM - Free Report) and Gildan Activewear (GIL Quick QuoteGIL - Free Report) .

Gildan Activewear presently carries a Zacks Rank #2 (Buy). GIL has a trailing four-quarter earnings surprise of 66.6%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Gildan Activewear’s current financial-year sales and earnings suggests growth of 8.9% and 3.3% from the year-ago period’s reported numbers, respectively.

Delta Apparel currently has a Zacks Rank #2. DLA has a trailing four-quarter earnings surprise of 95.5%, on average.

The Zacks Consensus Estimate for Delta Apparel's current financial year’s sales and earnings per share suggests growth of 11.9% and 10.1%, respectively, from the year-ago period's reported numbers.

Oxford Industries currently carries a Zacks Rank #2. OXM has a trailing four-quarter earnings surprise of 96.7%, on average.

The Zacks Consensus Estimate for Oxford Industries’ current financial year’s sales and earnings suggests growth of 51.9% and 523.8%, respectively, from the year-ago period's reported numbers.