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Nike Stumbles with First Earnings Miss in Three Years

Nike Inc., a worldwide leader in the athletic apparel sector, experienced its first earnings setback in three years. Despite posting impressive quarterly revenue figures, lower profit margins left a mark on the sports apparel behemoth’s fiscal fourth-quarter report card.

After the bell rang on Thursday, Nike’s shares took a tumble, dropping over 4% in after-hours trading. This fall adds to the about 3% drop witnessed throughout this year.

To grasp the bigger picture, let’s compare the sneaker powerhouse’s quarterly performance against Wall Street’s expectations, based on a Refinitiv survey of analysts:

  • Earnings per share: 66 cents vs. 67 cents expected
  • Revenue: $12.83 billion vs. $12.59 billion expected

Nike’s net income for the quarter ending May 31 stood at $1.03 billion, or 66 cents per share. This figure is down compared with $1.44 billion, or 90 cents a share, reported in the same period a year earlier. The dip in earnings caught Wall Street by surprise, marking a rare miss for Nike.

However, it wasn’t all doom and gloom for the sportswear titan. Quarterly sales rose to $12.83 billion, marking a 5% boost from the $12.23 billion reported a year ago, and outstripping analysts’ predictions. Nike’s revenue has been on a winning streak, beating estimates for seven straight quarters, primarily fueled by the sales rebound in China following the easing of pandemic restrictions.

The sportswear juggernaut’s full fiscal year revenue amounted to $51.2 billion, reflecting a 10% year-on-year increase and beating analysts’ expectations of $50.99 billion. Despite these gains, annual profits fell short of expectations. Nike reported earnings per share of $3.23, missing the $3.24 predicted by Wall Street. Nike’s net income for the fiscal year was $5.1 billion, down by 16% year-on-year.

Nike’s executives offered a somewhat subdued outlook for the coming quarters, emphasizing their vigilance of the broader economy, consumer behavior, and retail trends.

For fiscal 2024, Nike anticipates mid-single-digit revenue growth. These expectations fall slightly short of the 6.3% YoY growth forecast by analysts. Despite the modest projection, Nike believes its forecast is a “great number,” given the current macroeconomic landscape.

A decrease in the company’s gross margin by 1.4 percentage points to 43.6% was a significant factor contributing to the earnings miss. Although this margin narrowly beat analysts’ predictions, it was attributed to an amalgam of factors – increased product input costs, higher freight, and logistics expenses, extensive promotions to clear excess inventory, and unfavorable currency exchange rates.

Nike foresees a lift in pressure, expecting “above average margin improvement” in fiscal 2024, according to Chief Financial Officer Matthew Friend. Despite grappling with bloated inventory levels for several quarters, Nike managed to stabilize its inventory value at $8.5 billion, unloading about $400 million in inventories over the quarter.

While inventories remain 23% above pre-pandemic levels, the company believes it is in a “healthy” position. Nike has also relied on its wholesale partners to reduce inventory levels, which consequently trimmed its profit margins.

The decision to restore some wholesale relationships has led to speculations about a shift from Nike’s direct-to-consumer strategy. However, Nike CEO John Donahoe dismissed these claims, stating that Nike’s focus remains on meeting consumers’ shopping preferences.

Nike’s Direct channel posted a 15% YoY growth, hitting $5.5 billion. This growth was primarily driven by sales at Nike-owned stores and online channels. Encouragingly, member engagement on all of Nike’s digital platforms increased, and buying frequency hit a record high during the quarter.

As a silver lining amid its financial fluctuations, Nike’s sales in China soared 16% YoY, reaching $1.81 billion and exceeding Wall Street’s estimates. Despite the significant sales boost, it’s essential to note that these figures are compared against a period when China was still wrestling with lockdowns.

Revenue for the Converse brand, however, fell short of estimates. Sales for the brand dipped 1% during the quarter to $586 million, a miss from analysts’ expectations of $615.7 million.

Despite the speed bump, Nike continues to be a force to reckon with in the sports apparel industry. All eyes are now on the athletic apparel giant as it navigates this challenging terrain, watching to see how it adapts its strategies to rekindle its earnings flame.