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Nike (NKE) Up 9.2% Since Last Earnings Report: Can It Continue?
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A month has gone by since the last earnings report for Nike (NKE - Free Report) . Shares have added about 9.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Nike due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
NIKE Q2 Earnings & Sales Beat, Raises View
NIKE reported second-quarter fiscal 2023 results, wherein revenues and earnings beat the Zacks Consensus Estimate. The company’s top and bottom lines also improved year over year and were ahead of our estimate. Results gained from brand strength, robust consumer demand and an innovative product pipeline.
In the quarter, consumer demand for the company’s brands helped deliver strong double-digit currency-neutral revenue growth across NIKE, Jordan and Converse. The strong results were supported by continued strength in retail traffic trends within NIKE Direct, which boosted conversion rates. The strong member buying trends resulted in record digital results in the quarter.
Q2 Highlights
In second-quarter fiscal 2023, the company’s earnings per share of 85 cents rose 2% from 83 cents reported in the year-ago quarter. Earnings per share beat the Zacks Consensus Estimate of 65 cents and our estimate of 68 cents.
Revenues of the Swoosh brand owner grew 17% year over year to $13,315 million and surpassed the Zacks Consensus Estimate of $12,606 million and our estimate of $12,547 million. On a currency-neutral basis, revenues advanced 27% year over year, driven by growth in the NIKE Direct business. Organic revenue growth was higher than our estimate of 19.8%.
Sales at NIKE Direct were $5.4 billion, up 16% on a reported basis and 25% on a currency-neutral basis. The 25% currency-neutral increase included 34% growth at NIKE Digital and an 11% rise at NIKE stores, backed by a robust start to the holiday season. The NIKE Brand Digital’s revenues improved 25% on a reported basis and 34% on a currency-neutral basis.
Wholesale revenues improved 19% on a reported basis and 30% on a currency-neutral basis. The increase can be attributed to elevated demand for seasonal products and higher shipments, owing to improved supply availability. The results also reflected gains from strong year-over-year comparisons, as the company lapped last year’s shipment delays due to supply constraints.
Operating Segments
The NIKE Brand revenues were $12,724 million, up 18% year over year on a reported basis. We estimated NIKE Brand revenues of $11,987.9 million, reflecting year-over-year growth of 10.8%. Revenues for the brand rose 28% on a currency-neutral basis. Results were driven by continued consumer patronage and strength across all geographies, except for Greater China.
Within the NIKE brand, revenues in North America advanced 30% on a reported basis and 31% on a currency-neutral basis to $5,830 million. The upside can be attributed to strong market share gains, driven by a strong start to the holiday season and favorable consumer response to new merchandise. Wholesale revenues for the segment witnessed 37% growth, driven by strong marketplace partner demand and better inventory supply. Sales for the NIKE Direct business were up 23% in the region. Digital sales grew 31%, owing to double-digit growth in traffic and repeat buying trends by members.
In EMEA, the company’s revenues rose 11% on a reported basis and 33% on a currency-neutral basis to $3,489 million, driven by broad-based growth. NIKE Direct revenues for the segment grew 44% on a currency-neutral basis, with 62% growth in NIKE Digital. Strong member demand during the Cyber Week was a key driver, marking the highest demand week ever for the EMEA business.
In Greater China, revenues declined 3% year over year on a reported basis and rose 6% on a currency-neutral basis in the fiscal second quarter to $1,788 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 rose 4% on a currency-neutral basis, while NIKE Digital revenues improved 9% year over year.
In APLA, NIKE revenues advanced 19% on a reported basis and 34% on a currency-neutral basis to $1,599 million. The increase was driven by strength in Korea. NIKE Direct advanced 30% on a currency-neutral basis, driven by a 35% surge in NIKE Digital.
Revenues at the Converse brand grew 5% on a reported basis to $586 million. On a currency-neutral basis, revenues of the segment were up 12%, backed by double-digit growth in North America, somewhat offset by sluggishness in Asia.
Costs & Margins
The gross profit rose 10% year over year to $5,711 million, while the gross margin contracted 300 basis points (bps) to 42.9%. The decline in the gross margin can be attributed to higher markdowns to liquidate inventory, mainly in North America, increased freight and logistics costs, elevated product input costs, and currency headwinds. This was partly negated by the company’s pricing actions.
Selling and administrative expenses rose 10% to $4,124 million due to higher operating overhead and demand-creating expenses. As a percentage of sales, SG&A expenses declined 210 bps from the prior-year quarter to 31%.
Demand-creation expenses increased 8% year over year to $1,102 million, owing to elevated marketing and advertising investments.
Operating overhead expenses were up 10% to $3,022 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 $6,490 million, down 40% year over year. It had long-term debt (excluding current maturities) of $8,924 million and shareholders’ equity of $15,272 million as of Nov 30, 2022.
As of Nov 30, 2022, inventories of $9,362 million increased 43% from the prior-year levels due to an increase in units from the lapping of last year’s supply-chain issues, as well as higher input costs.
In second-quarter fiscal 2023, the company returned $2.1 billion to shareholders, including $1.6 billion in share repurchases and $480 million in dividends.
Outlook
Backed by the strong fiscal second-quarter performance, management anticipates low-teens revenue growth on a currency-neutral basis for fiscal 2023 compared with low-double-digit revenue growth mentioned earlier. Revenue growth, on a reported basis, is expected to be in the mid-single digits compared with low to mid-single-digit growth stated earlier. The revised view includes 700 bps of currency headwinds versus an 800-bps impact mentioned earlier.
For fiscal 2023, the company envisions a gross margin contraction of 200-250 bps, driven by continued liquidation actions in the second half. The gross margin decline includes 150 bps of adverse impact 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 impacts of 95 bps.
SG&A for fiscal 2023 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. The effective tax rate is expected to be in the high-teens range, driven by reduced benefits from stock-based compensation.
Moreover, the company predicts third-quarter fiscal 2023 revenue growth to be higher than the fourth quarter due to the timing of wholesale shipments. For third-quarter fiscal 2023, the gross margin is likely to decline at a similar rate to the second quarter of fiscal 2023, comprising a 120-bps impact from adverse currency. SG&A expenses are expected to be in line with the fiscal second quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
The consensus estimate has shifted -22.57% due to these changes.
VGM Scores
At this time, Nike has a nice Growth Score of B, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Nike has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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Nike (NKE) Up 9.2% Since Last Earnings Report: Can It Continue?
A month has gone by since the last earnings report for Nike (NKE - Free Report) . Shares have added about 9.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Nike due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
NIKE Q2 Earnings & Sales Beat, Raises View
NIKE reported second-quarter fiscal 2023 results, wherein revenues and earnings beat the Zacks Consensus Estimate. The company’s top and bottom lines also improved year over year and were ahead of our estimate. Results gained from brand strength, robust consumer demand and an innovative product pipeline.
In the quarter, consumer demand for the company’s brands helped deliver strong double-digit currency-neutral revenue growth across NIKE, Jordan and Converse. The strong results were supported by continued strength in retail traffic trends within NIKE Direct, which boosted conversion rates. The strong member buying trends resulted in record digital results in the quarter.
Q2 Highlights
In second-quarter fiscal 2023, the company’s earnings per share of 85 cents rose 2% from 83 cents reported in the year-ago quarter. Earnings per share beat the Zacks Consensus Estimate of 65 cents and our estimate of 68 cents.
Revenues of the Swoosh brand owner grew 17% year over year to $13,315 million and surpassed the Zacks Consensus Estimate of $12,606 million and our estimate of $12,547 million. On a currency-neutral basis, revenues advanced 27% year over year, driven by growth in the NIKE Direct business. Organic revenue growth was higher than our estimate of 19.8%.
Sales at NIKE Direct were $5.4 billion, up 16% on a reported basis and 25% on a currency-neutral basis. The 25% currency-neutral increase included 34% growth at NIKE Digital and an 11% rise at NIKE stores, backed by a robust start to the holiday season. The NIKE Brand Digital’s revenues improved 25% on a reported basis and 34% on a currency-neutral basis.
Wholesale revenues improved 19% on a reported basis and 30% on a currency-neutral basis. The increase can be attributed to elevated demand for seasonal products and higher shipments, owing to improved supply availability. The results also reflected gains from strong year-over-year comparisons, as the company lapped last year’s shipment delays due to supply constraints.
Operating Segments
The NIKE Brand revenues were $12,724 million, up 18% year over year on a reported basis. We estimated NIKE Brand revenues of $11,987.9 million, reflecting year-over-year growth of 10.8%. Revenues for the brand rose 28% on a currency-neutral basis. Results were driven by continued consumer patronage and strength across all geographies, except for Greater China.
Within the NIKE brand, revenues in North America advanced 30% on a reported basis and 31% on a currency-neutral basis to $5,830 million. The upside can be attributed to strong market share gains, driven by a strong start to the holiday season and favorable consumer response to new merchandise. Wholesale revenues for the segment witnessed 37% growth, driven by strong marketplace partner demand and better inventory supply. Sales for the NIKE Direct business were up 23% in the region. Digital sales grew 31%, owing to double-digit growth in traffic and repeat buying trends by members.
In EMEA, the company’s revenues rose 11% on a reported basis and 33% on a currency-neutral basis to $3,489 million, driven by broad-based growth. NIKE Direct revenues for the segment grew 44% on a currency-neutral basis, with 62% growth in NIKE Digital. Strong member demand during the Cyber Week was a key driver, marking the highest demand week ever for the EMEA business.
In Greater China, revenues declined 3% year over year on a reported basis and rose 6% on a currency-neutral basis in the fiscal second quarter to $1,788 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 rose 4% on a currency-neutral basis, while NIKE Digital revenues improved 9% year over year.
In APLA, NIKE revenues advanced 19% on a reported basis and 34% on a currency-neutral basis to $1,599 million. The increase was driven by strength in Korea. NIKE Direct advanced 30% on a currency-neutral basis, driven by a 35% surge in NIKE Digital.
Revenues at the Converse brand grew 5% on a reported basis to $586 million. On a currency-neutral basis, revenues of the segment were up 12%, backed by double-digit growth in North America, somewhat offset by sluggishness in Asia.
Costs & Margins
The gross profit rose 10% year over year to $5,711 million, while the gross margin contracted 300 basis points (bps) to 42.9%. The decline in the gross margin can be attributed to higher markdowns to liquidate inventory, mainly in North America, increased freight and logistics costs, elevated product input costs, and currency headwinds. This was partly negated by the company’s pricing actions.
Selling and administrative expenses rose 10% to $4,124 million due to higher operating overhead and demand-creating expenses. As a percentage of sales, SG&A expenses declined 210 bps from the prior-year quarter to 31%.
Demand-creation expenses increased 8% year over year to $1,102 million, owing to elevated marketing and advertising investments.
Operating overhead expenses were up 10% to $3,022 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 $6,490 million, down 40% year over year. It had long-term debt (excluding current maturities) of $8,924 million and shareholders’ equity of $15,272 million as of Nov 30, 2022.
As of Nov 30, 2022, inventories of $9,362 million increased 43% from the prior-year levels due to an increase in units from the lapping of last year’s supply-chain issues, as well as higher input costs.
In second-quarter fiscal 2023, the company returned $2.1 billion to shareholders, including $1.6 billion in share repurchases and $480 million in dividends.
Outlook
Backed by the strong fiscal second-quarter performance, management anticipates low-teens revenue growth on a currency-neutral basis for fiscal 2023 compared with low-double-digit revenue growth mentioned earlier. Revenue growth, on a reported basis, is expected to be in the mid-single digits compared with low to mid-single-digit growth stated earlier. The revised view includes 700 bps of currency headwinds versus an 800-bps impact mentioned earlier.
For fiscal 2023, the company envisions a gross margin contraction of 200-250 bps, driven by continued liquidation actions in the second half. The gross margin decline includes 150 bps of adverse impact 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 impacts of 95 bps.
SG&A for fiscal 2023 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. The effective tax rate is expected to be in the high-teens range, driven by reduced benefits from stock-based compensation.
Moreover, the company predicts third-quarter fiscal 2023 revenue growth to be higher than the fourth quarter due to the timing of wholesale shipments. For third-quarter fiscal 2023, the gross margin is likely to decline at a similar rate to the second quarter of fiscal 2023, comprising a 120-bps impact from adverse currency. SG&A expenses are expected to be in line with the fiscal second quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
The consensus estimate has shifted -22.57% due to these changes.
VGM Scores
At this time, Nike has a nice Growth Score of B, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Nike has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.