Nike (NKE 0.12%) reported fiscal 2022 third-quarter results after the markets closed on Monday, March 21. The company beat Wall Street expectations on the top and bottom line as consumer demand remains resilient. The coronavirus pandemic has negatively impacted Nike's ability to manufacture enough products to fill an insatiable consumer appetite.
It's further having difficulty getting products where consumers want them. Surprisingly, consumers are increasing spending despite the myriad risks facing world economies. Let's look closer at Nike's third-quarter results.
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Nike's gross profit margin is expanding
In its third quarter ended on Feb. 28, Nike generated revenue of $10.9 billion. That was up by 5% from the same quarter in the prior year. Analysts on Wall Street expected Nike to report revenue of $10.63 billion. Management was pleased with the quarter.
"NIKE's strong results this quarter show that our Consumer Direct Acceleration strategy is working, as we invest to achieve our growth opportunities," President and CEO John Donahoe said in a statement. "Fueled by deep consumer connections, compelling product innovation, and an expanding digital advantage, we have the right playbook to navigate volatility and create value through our relentless drive to serve the future of sport."
Indeed, Nike brand digital sales increased by 22% year over year in its recently completed quarter. The trend highlights Nike's intentional shift to emphasize direct-to-consumer sales. Nike earns a higher profit margin on sales through its website and shoe-focused app. To help secure inventory for its own channel, Nike is limiting the products it sends to wholesalers.
Already, the strategy is bearing fruit. The company reported a gross profit margin of 46.6% in its quarter ended Feb. 28. That was up by 100 basis points from the same time last year, and the highest in the previous decade. For the nine months ended Feb. 28, Nike's gross profit margin is 46.3%.
The profit margin is also benefiting from widespread shortages. With fewer products available for sale, consumers are willing to pay full price for the item they are looking for, lest it sell out before it ever goes on sale. Rising costs for materials and transportation are offsetting consumer willingness to pay higher prices. Overall, Nike reported diluted earnings per share of $0.87. Analysts on Wall Street were expecting Nike to report earnings per share of $0.71.
Nike shares rise after the earnings release
Nike ended the quarter with $7.7 billion in inventory. That was up by 15% compared to the same time last year. The level is still below where Nike would like to be and what consumers would like to see on shelves. Shareholders are hoping supply chain challenges caused by the pandemic will ease as the year progresses and Nike can unleash its full force of popular products for consumers to buy.
Management lowered those expectations by telling analysts on the conference call that followed the earnings release to expect revenue to decrease year over year in the fourth quarter. Still, investors were pleased with forecasts for profit margin to rise by 150 basis points in Q4, and that could help Nike shares rebound further from their recent pullback.
