Nike (NKE) – Earnings Review – December 22, 2023

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Nike (NKE) – Earnings Review – December 22, 2023

Results

  • Barely missed revenue estimates by 0.3% and roughly met its revenue growth guidance.
  • Beat gross margin estimates by 60 basis points (bps; 1 bps = 0.01%) and beat its margin guidance by 70 bps.
  • Nike comfortably beat EBIT estimates by 18.5%.
  • Beat $0.85 earnings per share (EPS) estimates by $0.18 representing a 21.2% net income beat. EPS rose by about 20% Y/Y.

Please note that Nike worked aggressively to liquidate inventory gluts throughout 2023. This makes for easier margin comps and tougher revenue growth comps in fiscal year 2024 (especially Q1 and Q2).

Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases

Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases

Full Year Guidance

Nike lowered its full year revenue growth guide from mid-single digits to 1% Y/Y. Analysts were hoping for 3.8% Y/Y revenue growth heading into the report. Unfortunately, selling, general and administrative (SG&A) growth guidance was not lowered alongside the revenue cut. It still expects SG&A growth in the mid-single digits for the year. It had previously told us that SG&A would be slightly lower than its old mid-single digits revenue growth guide. The lone bright spot of the guide was reiterated guidance of 150 bps of Y/Y gross margin leverage.

“Last quarter, I highlighted operating risks like a stronger U.S. dollar, consumer demand and our wholesale order books. Looking forward, the impact of these risks is becoming clearer. And as a result, we are adjusting our full year financial outlook.” – CFO Matthew Friend

Balance Sheet

  • $9.9 billion in cash & equivalents.
  • $8 billion in inventory represents -14% Y/Y growth as it right-sizes its inventory position like many other retailers have had to do.
  • Basic share count fell 2.4% Y/Y; Diluted share count fell 2.5% Y/Y.
  • $8.9 billion in debt (none of it is current).
  • $1.2 billion in buybacks with $10.9 billion left on its 4 year plan issued in June, 2022.

Call Highlights

On Results

Nike blamed the poor guidance on a few factors. First is the highly promotional environment (especially in China and Europe) that it’s seeing across all channels. Nike is not willing to follow suit or “chase” that discounting activity. This is resulting in slower growth and the revised guidance and is why that happened while gross margin was reiterated. The competition is responding to a weaker consumer and more cautious spending with better deals. China was the most pronounced source of weakness here, but discounting overall is becoming sharper for many.

“We are seeing indications of more cautious consumer behavior around the world in an uneven macro environment.” – CFO Matthew Friend

This is making Nike’s products comparatively more expensive while the consumer feels less confident. That’s a large part of the weakness. Nike is still taking market share with strong 10% Y/Y holiday revenue growth and the firm is still seeing a larger portion of sales at full price as well as strength across its higher-priced items. The backdrop is simply heavily weighing on this company.

“Overall, we have maintained lower markdown rates than many of our competitors.” – CFO Matthew Friend

The second factor cited was simply execution-based. Leadership reminisced on the investments made in Nike Direct since 2019. It talked up the benefits of these investments, but also “added complexity and inefficiency.” These weak spots are being addressed through accelerated innovation and better consumer experiences. Another big piece of this will be pulling $2 billion in cost over the next 3 years from inefficient and redundant sources to plow back into its highest priority growth initiatives. It’s about a year late on this as most large caps have already begun cost-cutting. The company will look to drive savings via simplified product assortment, supply chain efficiencies and investments in automation.

It’s using this highly promotional environment to pull attention and supply away from current franchises to refocus on new franchises and consumer activations.

“The second half of fiscal ’24 represents the start of a multiyear product innovation cycle that will introduce new franchises, concepts and platforms, elevating our full portfolio. And while there’ll be some key moments in the second half, this new innovation cycle will take some time to fully ramp up, given our size and scale.” – CEO John Donahoe

Final Notes

  • NIKE was the #1 sports brand on Tmall for China’s 11.11 event.
  • Jordan is “well on its way” to being the #2 footwear brand in North America. Jordan Apparel has grown at an annual clip of 20% since 2020.

Take

This quarter stands in stark contrast to the glowing demand commentary Lululemon’s team gave on their last call. Lulu did acknowledge China’s headwinds, but confidently proclaimed how well they were overcoming that headwind and all others. I don’t think this is a matter of Nike underperforming vs. the pack as others in the space have dealt with similar issues. Nike is faring better than most… Lululemon is just special in my shareholder opinion. Nike continues to take share and continues to be the ubiquitous brand. It needs to improve execution and for consumer headwinds to fade like they soon will.

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