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NIKE (NKE) Q1 Earnings & Revenues Beat on Brand Strength

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NIKE Inc. (NKE - Free Report) reported first-quarter fiscal 2023 results, wherein revenues and earnings beat the Zacks Consensus Estimate. Results gained from brand strength, robust consumer demand and an innovative product pipeline.

Shares of NIKE declined more than 9% after the market trading session on Sep 29. This might be due to expected higher markdowns during the holiday season and slowed demand for Nike's brands, including Jordan and Converse, stemming from reduced discretionary spending. Also, heavy discounts and rapidly strengthening dollars remain concerning.

Overall, shares of the Zacks Rank #4 (Sell) company have plunged 6.7% in the past three months compared with the industry’s decline of 2.5%.


Zacks Investment Research
Image Source: Zacks Investment Research


Q1 Highlights

In first-quarter fiscal 2023, the company’s earnings per share of 93 cents decreased 17.1% from $1.16 reported in the year-ago quarter. However, earnings per share beat the Zacks Consensus Estimate of 91 cents.

Revenues of the Swoosh brand owner grew 4% year over year to $12,687 million and surpassed the Zacks Consensus Estimate of $12,271 million. On a currency-neutral basis, revenues advanced 10% year over year, driven by growth in the NIKE Direct business.

Sales at NIKE Direct were $5.1 billion, up 8% on a reported basis and 14% on a currency-neutral basis. The NIKE Direct business benefited from double-digit currency-neutral growth in North America, EMEA and APLA, which somewhat offset weakness in Greater China. The NIKE Brand Digital revenues improved 16% on a reported basis and 23% on a currency-neutral basis on double-digit growth in EMEA.

Wholesale revenues inched up 1% on a reported basis and improved 8% on a currency-neutral basis. This is mainly due to improved inventory levels.

Operating Segments

The NIKE Brand revenues were $12,048 million, up 4% year over year on a reported basis. Revenues for the brand rose 10% on a currency-neutral basis. Strength in North America, EMEA and APLA regions aided the results.

Within the NIKE brand, revenues in North America declined 13% on both reported and currency-neutral basis to $5,510 million. Wholesale revenues for the segment witnessed low-double-digit growth, driven by strong improvement from strategic partners such as DICK'S and JD Finish Line, as well as our authenticated partners. Sales for the NIKE Direct business were up 13% in the region. Digital sales grew 19%, owing to member demand and growth in the NIKE app.

In EMEA, the company’s revenues rose 1% on a reported basis and 17% on a currency-neutral basis to $3,333 million, driven by broad-based growth and strong gross margin expansion. Consequently, NIKE Direct revenues for the segment rose 20% on a currency-neutral basis. The NIKE Digital business grew 46% year over year. Positive consumer response, particularly for the Pegasus 39, Invincible 2 and the Peg Trail 4, aided quarterly growth.

In Greater China, revenues slumped 16% year over year on a reported basis and 13% on a currency-neutral basis in the fiscal first quarter to $1,656 million. The region was impacted by the adverse impacts of COVID-19 disruption in the quarter, leading to muted store operations and retail traffic. NIKE Direct fell 2% on a currency-neutral basis, while NIKE Digital revenues declined 5% year over year.

In APLA, NIKE revenues advanced 5% on a reported basis and 16% on a currency-neutral basis to $1,535 million. This marked the third consecutive quarter of double-digit currency-neutral growth, driven by strength across Southeast Asia, and India and Korea. NIKE Direct advanced 30%, driven by a 29% surge in NIKE Digital and 31% growth in NIKE-owned stores.

Revenues at the Converse brand grew 2% on a reported basis to $643 million. On a currency-neutral basis, revenues of the segment were up 8%, backed by double-digit growth in North America and Europe, which was somewhat offset by sluggishness in Asia.

NIKE, Inc. Price, Consensus and EPS Surprise


NIKE, Inc. Price, Consensus and EPS Surprise

NIKE, Inc. price-consensus-eps-surprise-chart | NIKE, Inc. Quote

Costs & Margins

The gross profit fell 1% year over year to $5,615 million, while the gross margin contracted 220 basis points (bps) to 44.3%. The decline in the gross margin can be attributed to increased freight and logistics costs, drab margins in its NIKE Direct business stemming from higher markdowns, and currency headwinds. This was partly negated by the company’s pricing actions.

Selling and administrative expenses rose 10% to $3,920 million due to higher operating overhead and demand-creating expenses. As a percentage of sales, SG&A expenses expanded 170 bps from the prior-year quarter to 31%.

Demand-creation expenses increased 3% year over year to $943 million, owing to the normalization of sports marketing expenses and brand campaign investments.

Operating overhead expenses were up 12% to $2,977 million on higher wage-related expenses and NIKE Direct costs, as well as increased technology investments to support digital transformation.

Balance Sheet & Shareholder-Friendly Moves

The company ended the quarter with cash and short-term investments of $11,876 million, down 33% year over year. It had long-term debt (excluding current maturities) of $8,922 million and shareholders’ equity of $15,822 million as of Aug 31, 2022.

As of Aug 31, 2022, inventories of $9,662 million increased 44% 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 first-quarter fiscal 2023, the company returned $1.5 billion to shareholders, including $1 billion in share repurchases and $480 million in dividends.


For fiscal 2023, management anticipates low-double-digit revenue growth on a currency-neutral basis and revenue growth of low to mid-single digits on a reported basis. This view includes 800 bps of currency headwinds.

The company envisions a gross margin contraction of 200-250 bps, including 150 bps of adverse impact stemming from significant markdowns and higher off-price mix to liquidate elevated inventory, along with more than 100 bps headwinds related to elevated freight and logistic costs and unfavorable currency impact of 70 bps. SG&A is predicted to increase in the high-single digits due to increased investment in new transformational capabilities, which is likely to be partly offset by reduced expenses and limited headcount growth across the business.

For second-quarter fiscal 2023, revenues are expected to grow in low-double digits, including 900 bps of currency headwinds. The gross margin is likely to decline 350-400 bps year over year.

Stocks to Consider

Here we highlighted three better-ranked stocks, namely Designer Brands (DBI - Free Report) , Oxford Industries (OXM - Free Report) and lululemon athletica (LULU - Free Report) .

Oxford Industries is a renowned apparel company. It currently sports a Zacks Rank #1 (Strong Buy). OXM has a trailing four-quarter earnings surprise of 91.1%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Oxford Industries’ current financial-year revenues and EPS suggests growth of 15.3% and 25.7%, respectively, from the earlier fiscal year’s reported figures.

Designer Brands designs, manufactures and retails footwear and accessories. The company currently has a Zacks Rank #2 (Buy).

The Zacks Consensus Estimate for Designer Brands’ current financial-year revenues and EPS suggests growth of 6.9% and 23.5%, respectively, from the previous fiscal year’s reported figures. DBI has a trailing four-quarter earnings surprise of 55.1%, on average.

lululemon, the designer and distributor of athletic apparel and accessories, carries a Zacks Rank of 2 at present. LULU has an expected EPS growth rate of 20% for three-five years.

The Zacks Consensus Estimate for lululemon’s current financial-year sales and EPS suggests growth of 26.6% and 25.9%, respectively, from the preceding fiscal year’s reported numbers. LULU has a trailing four-quarter earnings surprise of 10.4%, on average.

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