Nike (NKE 0.88%) is about to update investors on its growth pace, right in the middle of the industry's biggest selling period. The company's latest demand and cost trends will be part of its fiscal second-quarter earnings report on Monday, Dec. 20.
Wall Street has modest expectations heading into that announcement, but Nike could have some surprisingly positive things to say about its business despite slowing year-over-year growth trends.
Let's take a closer look.
Image source: Getty Images.
Sales trends
Nike reported slowing growth last quarter, with revenue gains decelerating to 12% at the start of fiscal 2022. Demand wasn't the problem, executives said, but inventory was the main challenge. "Our ... results would have been stronger if not for supply chain congestion," CFO Matthew Friend said in a late September conference call.
We'll find out this week whether Nike solved some of those congestion issues and raised inventory levels back up to normal. But most investors are expecting sales to rise only modestly compared to last year's $11.2 billion level. Revenue should increase in the low-single-digit range to $11.26 billion, according to Wall Street estimates. Lululemon Athletica, by contrast, recently reported a 30% year-over-year sales spike for the period ended in late October.
Higher margins
Like Lululemon, Nike is enjoying higher demand for its premium products and its digital sales channel. Each of those trends positively impacts profitability, and gross profit margin jumped by nearly 2 full percentage points last quarter to 46.5% of sales.
NKE Gross Profit Margin data by YCharts
Those gains are being tempered by inflation and rising transportation costs. Monday's report should show just how well management was able to balance these issues so that profitability keeps climbing toward 50% of sales. Lululemon has seen five years of expanding margins and is now approaching a 60% gross profit rate.
The holiday update
Management's comments on the growth outlook will have the benefit of relying on actual sales data from a large portion of the peak holiday selling period. Heading into the report, most investors are expecting sales to rise by just 6% this fiscal year. That modest prediction mainly hinges on management's weak short-term forecast that in late September described persistent manufacturing challenges through the first half of 2022. "We now expect [annual] revenue to grow mid-single digits," Friend said, "versus our prior guidance of low double-digit growth."
Nike might change its tune slightly on that outlook Monday, depending on how well it did ramping up production across its global manufacturing base. Yet, look for management to remain bullish about its long-term growth and earnings prospects, which will be powered by new product releases, rising marketing spending, and a sustained shift toward direct-to-consumer sales.
Those are the key trends worth watching over the next few quarters, which might show unusually weak sales growth as Nike works through the remaining supply chain challenges that have hurt the business over the last six months.
