Nike's (NKE -1.72%) fiscal 2021 is off to a fast start. The footwear giant this week reported surprisingly strong operating results through late August as its business mended from COVID-19 disruptions in key markets like China, Latin America, and the U.S.
Sales are still shrinking in many geographies, but Nike's overall results point to a potentially sharp growth rebound over the next few quarters. Let's take a closer look.
On the mend
Nike notched solid demand improvements in both China and the U.S., the countries that most directly impact its global growth profile. Sales in the China region grew 8% year over year compared to a 1% uptick last quarter. That segment posted a 4% year-over-year slump in fiscal Q3 2020 as COVID-19 ended Nike's 22-quarter streak of double-digit growth there.
The U.S. division rebounded even more sharply, with revenue falling just 1% from the prior year compared to a 46% plunge during the maximum impact of pandemic-related retailing shutdowns. That result was again supported by booming digital demand and helped Nike post an overall flat sales figure. Investors were bracing for a significant decline.
Nike announced a head-turning 10% year-over-year earnings improvement, which was also well ahead of expectations. Investors shouldn't read too much into that result, since it was powered by a sharp, temporary drop in marketing spending. Postponed or canceled sporting events helped push marketing expenses lower by 33%. Those costs will rebound with the return of sports. The company's other expense trends tracked right along with revenue thanks to cost cuts.
Nike did see some inventory pressure and had to cut prices in a few areas to keep inventory moving. Gross profit margin dipped by 0.9 percentage points to 44.8% of sales. Yet the company avoided major write-down charges, which suggests it is in a good selling position heading into the holiday shopping season.
Inventory is still elevated, having risen 15% this quarter compared to the flat revenue result. But executives said they aren't worried about those holdings since there's a good balance right now between the company's manufacturing pace and consumer demand. "Nike is recovering faster," CFO Matt Friend said in a press release, "based on accelerating brand momentum and digital growth, as well as our relentless focus on normalizing marketplace supply and demand."
That means that while profitability could be pressured over the next few quarters as Nike restarts its massive global marketing engine and continues working through spots of excess inventory, its business is on track for a return to strong growth by the holiday season. Sure, there's uncertainty around economic growth and a potentially stubborn recession ahead. Nike is also still losing ground in parts of Latin America and Asia and has to cut costs more aggressively over the next few quarters.
But investors got to hear the answer they were hoping for about the company's core demand position. Nike is marching back toward double-digit growth in China and is poised to return to positive territory in the U.S. by the holidays, just two quarters after reporting a historic 46% year-over-year sales dive. That's plenty of good news worth celebrating about this strong business.