Nike (NKE) – Earnings Review – March 23, 2024
Results
- Beat revenue estimate by 1.1% & beat its revenue guidance by about the same amount.
- Beat $0.71 GAAP EPS estimates by $0.06. GAAP EPS included $0.27 ($405 million) in restructuring charges for the quarter.
- Ex-restructuring, EPS rose 24% Y/Y.
- There will be restructuring charges in Q4, but a much smaller amount.
- Missed gross margin estimates by 30 basis points (bps; 1 bps = 0.01%) and its guidance by 20 bps.
- Strategic pricing and logistics disinflation powered gross margin expansion.
- Beat GAAP EBIT estimates by 2.3%.
- Sales, General & Administrative (SG&A) costs rose by 7% Y/Y with most of that driven by 10% growth in “demand creation expense.”
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Balance Sheet
- $10.6 billion in cash & equivalents.
- $8.9 billion in total debt.
- Share count fell by 2% Y/Y. $10 billion left in buyback capacity.
- Dividends rose 6% Y/Y.
- Inventory fell by 13% Y/Y. Nike reached its lowest levels since 2020.
Guidance & Valuation
This year’s updated guidance:
- Reiterated 1% Y/Y revenue growth vs. 1.1% Y/Y growth expected.
- Reduced ex-restructuring SG&A spend from low Y/Y growth to no growth.
- Maintained GPM expansion guidance of 150 bps.
For next year, Nike expects revenue to grow and EBIT margin to expand. Both vague items are roughly as expected.
Nike trades for 24x next 12 month earnings. Earnings are expected to grow about 12% Y/Y during that period.
Call & Release Highlights
“We know Nike is not performing in line with our potential. It’s clear we need to make some important adjustments” – CEO John Donahoe
Making Adjustments – Product Newness & Innovation:
Earlier in the fiscal year, Nike made the decision to wind down supply of some legacy franchises and focus on innovation. For example, it cut older Pegasus shoe models to focus on upcoming launches. It accelerated its product roadmap by a full year and set out to vastly tighten and improve its brand storytelling, with an added emphasis on sports. The early reception has been positive to a point of “accelerating these actions” even further.
One key franchise focus will be Air. Nike will soon roll out a new air chamber to enhance the comfort and natural fit of the lineup and this tech will eventually be used across most Air models. Nike continues to see new Air launches work while these launches also improve demand for the rest of the existing product line. This $10+ billion franchise was a vital part of Nike’s past, and that will not change going forward. As evidence of shoe innovation working, most of its 20 top sellers are either relatively new or recently updated models.
Nike’s direct-to-consumer (DTC) business will be the main channel focus. It will still work closely with its wholesalers to refresh their inventory, elevate its brand presence, and grow its overall market.
“Our product portfolio will go through a period of transition over the coming quarters. But altogether, we are relentlessly focused on driving NIKE’s next chapter of healthy and sustainable growth.” – CEO John Donahoe
Making Adjustments – Sharpen Organizational Focus:
Nike conducted a broad restructuring in June to reduce redundant costs and reallocate the savings back into its highest priorities. It also reshuffled its support and operational teams this quarter to streamline middle-management layers. Meta, Google and many other companies have done the same over the last couple years. It’s reducing the breadth of its brand story-telling and investing in only its highest impact marketing themes.
“Restructuring our organization to sharpen our focus, we believe, will fuel our next phase of growth.” – CEO John Donahoe
Geographic Performance:
Nike’s quarter was the polar opposite of Lululemon’s. Nike’s results for the quarter were strongest in North America, in line in China, and weak in Europe. It blamed Europe weakness on macro volatility and softening consumer demand. Lighter markdowns and a strong holiday season in North America drove the outperformance here.
- North American revenue rose 3% Y/Y with EBIT up 18% Y/Y.
- EMEA revenue fell 4% Y/Y with EBIT down 6% Y/Y.
- China revenue rose 6% Y/Y with EBIT up 3% Y/Y.
Take
Nike continues to work through a difficult product refresh transition. Its guidance assumes negative revenue growth for the first half of the year, which is a disappointment. That will mean about 18 months of flat Y/Y revenue growth. This is still an iconic brand and still has significant potential to make results look better. I reject the notion that On Running and Hoka are rapidly ruining its competitive edge and moat. I just think this team needs to execute better and likely needs a bit of macro cooperation too.
