Nike (NKE 2.43%) is still reeling from factory shutdowns and other supply chain challenges tied to the COVID-19 pandemic. That clogged pipeline was a major takeaway from its recent earnings report that showed flat sales in the fiscal second quarter of 2022.
But the footwear giant had good news for investors, too, including a boost to its profit outlook. Executives also affirmed their forecast for modest sales growth this fiscal year despite the headwinds coming from another round of economic restrictions across key markets like China and Europe.
Image source: Getty Images.
Holding steady
Nike's sales didn't budge compared to last year after accounting for currency exchange swings. That flat result might seem like a letdown at first glance. Rival Lululemon Athletica, after all, reported a 30% revenue spike in its most recent quarter. But Nike's performance edged past Wall Street's targets this time out as it generated $11.4 billion of revenue (compared to Lululemon's $1.5 billion ).
The company saw solid demand trends in the U.S. market, but sales fell hard in China to pull overall growth to zero. In a conference call with investors, CEO John Donahoe and his team blamed temporary factory shutdowns while saying the wider expansion plan is intact. "Results for this quarter were as expected," given those challenges, Donahoe explained.
Higher margins
The news was better around profitability, with gross profit margin jumping by 2.8 percentage points to reach 46% of sales. Nike is capitalizing on strong demand for premium products and on a continuing shift toward direct-to-consumer sales, which are about twice as profitable as its warehouse retailing sales. That success allowed earnings to rise 6% even though revenue held steady.
That financial strength powered increasing cash returns. Shareholders received $1.4 billion from the company this quarter, mainly through $1 billion of stock buyback spending.
The dividend payment was $437 million, up 14%. The higher earnings also freed management up to spend aggressively on marketing and branding activities, with that expense jumping 40% to $1 billion. "We expect those investments to pay dividends as we look toward the future," CFO Matthew Friend said.
Looking ahead
Executives said the China segment will continue dragging the wider business lower this year, but its losses should moderate over the next few quarters now that manufacturing capacity is back near normal. Investors can look forward to seeing the China business improve on the 24% slump from this quarter.
Overall, sales in fiscal 2022 should rise at roughly the same 6% pace investors have seen over the last six months. That increase isn't as strong as the double-digit spike that shareholders were expecting at the start of the year. But the outlook hasn't worsened since September, even through supply chain challenges and continued pandemic-related disruptions.
If investors had any doubt about whether Nike is still in growth mode, its spiking marketing spending should ease those concerns. At over $1 billion of branding and promotions this quarter, which management calls "demand creation expense," this discretionary commitment is surging compared to last year.
Sure, it might take another quarter or two before Nike's inventory and supply chains are back to normal. But the company is well-positioned for a rebound after those issues recede -- and betting aggressively on that recovery.
