Nike Shares Drop Despite Sales Beat as Inventories Swell
Global fitness apparel maker Nike’s shares were trading lower this morning after the company reported earnings and margins that missed investors’ expectations. Despite beating revenue and for the fiscal first quarter of 2023, the company said a sharp increase in inventories during the period resulted with the company having to offer more promotions, which depressed its profit margins. Shares were off 12% in early morning trading. Nike shares have dropped close to 50% on a year-to-date basis, underperforming the S&P 500 Index, which is off by 23.6% and down to levels last seen during the first few months of the pandemic.
Total revenue for the period ended August 31st rose by 3.6% year over year, to $12.69 billion, ahead of the estimated $12.32 billion. Sales in greater China fell by 16%, coming in at $1.66 billion which was higher than the anticipated $1.65 billion. But most critically, North American topline increased by a strong 13% to $5.51 billion, against the $5.05 billion expected by analysts. Direct sales from Nike’s own sales-channels rose to $5.1 billion, higher than the $5 billion estimated by Wall Street. Digital sales rose a whopping 16%, ahead of the 11.4% estimated.
Additionally, Asia Pacific (excluding China) and Latin America sales came in at $1.54 billion, up 4.8% year over year, versus the $1.5 billion modelled by analysts. One negative sales spot for the company was the EMEA, or Europe, Middle East and Africa, region where revenue was flat at $3.33 billion lower than the expected $3.38 billion. Footwear, the largest division at the company, produced revenue of $8.11 billion during the three-month period, ahead of the $7.8 billion expected. The company reported apparel revenue of $3.43 billion, also ahead of the $3.33 billion expected.
Despite the beat on sales, adjusted earnings per share fell to 93¢ versus $1.16 in the first quarter of fiscal 2022, and the 94¢ that analysts expected. Inventories in North America surged by 65% and have forced management into marking down product prices to get product out the door. Management noted in the earnings call that they expect gross margins to drop by between 2% to 2.5% for the fiscal year, despite Wall Street’s expectations that margins would stay flat. Rising inflation, long supply chains and an extremely strong dollar have all impacted margins.
Nike reported a gross margin of 44.3% versus the 46.5% in the first quarter of fiscal 2022. Analysts were expecting a gross margin of 45.4%. Aggregate selling and administrative expenses also ballooned, totaling $3.92 billion, worse than the average estimate of $3.8 billion. Management indicated that it expects to discount some of this inventory in the second quarter to push new products later in the fiscal year. The company did reiterate that demand for its products across all markets remains robust. The executive team is also expecting sales in China to rebound swiftly as the country emerges from its Covid-zero policy.
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