Investors in Nike (NKE -0.98%) were hit with a few unwelcome surprises in the company's latest earnings report. Sales growth turned negative over the holiday season, the company revealed, and inventory levels are spiking.
Yet management affirmed its aggressive growth outlook for the year and even boosted Nike's projected profitability for the rest of 2021. In a fiscal 2021 third-quarter conference call with investors, CEO John Donahoe and his team explained why the last quarter's weak results should be an outlier in an otherwise strong growth rebound story.
Let's look at three highlights from that presentation.
Image source: Getty Images.
1. Q3 was just a temporary speed bump
"While we are optimistic about the pace of vaccine distribution and how this will enable safe reopening of the global economy in the near future, the effects of the virus continue to create short-term volatility in our business performance," CFO Matthew Friend said.
Management back in December warned about potentially bumpy operating results ahead due to COVID-19 challenges. That volatility severely impacted the third quarter.
Shipping companies were overwhelmed as holiday shopping peaked in December, leading to delayed product deliveries. Those delays were the main reason sales growth turned negative in the third quarter after returning to positive territory in the previous quarter.
It's also the biggest driver behind those spiking inventory levels. The good news is that demand for footwear and apparel isn't dropping. And these supply challenges should completely reverse themselves in the current quarter. "We expect to capture this delayed revenue in the fourth quarter," Friend predicted.
2. Nike sees improving finances, especially in e-commerce
"From our relentless flow of new product and storytelling to our deep consumer connections, our extensive portfolio of athletes and teams and the scale of our digital platforms, Nike is positioned to drive high-quality, sustainable, and profitable growth," Friend said.
The company's gross profit margin rose despite the sales pressure from shipping bottlenecks. That success reflected rising average prices across the portfolio and a continued shift toward more-profitable direct-to-consumer sales. Both of these trends should keep lifting the business well beyond fiscal 2021, and Nike is working hard to support them through a faster pace of new product launches and a more robust digital platform.
Donahoe said the U.S. e-commerce niche is one great example of this growth process at work. The division just had its first-ever quarter of $1 billion in revenue yet should see many more quarters of market-thumping sales gains ahead. "Nike's digital transformation remains a unique advantage," Donahoe said.
3. It is full speed ahead
"Nike is staying on offense and we're focused on extending our leadership position," the CEO said.
Nike's declining sales in the third quarter didn't cause any concern about the broader business trajectory. In fact, management's outlook is brightening. Executives affirmed their fiscal-year growth prediction while boosting their profitability forecast for 2021.
Investors can see evidence of that bullish outlook in other areas, too. Nike is expecting to resume stock repurchase spending this quarter, for example, and is ramping up inventory purchasing and aggressively allocating cash toward advertising and marketing.
All of these projects were curtailed during 2020 due to uncertainty caused by the pandemic. But that cloud is lifting. "We can see the near-term operating environment with increasing clarity," Friend said, "yet we remain focused on what's required to win for the long term."
