Nike (NKE 0.95%) investors had low expectations heading into the company's holiday season earnings announcement. Growth stalled in the fiscal Q1 quarter, which runs through late November, as a slowing Chinese market weighed on global results. Wall Street wasn't excited about the prospects for the U.S. division either, thanks to supply-chain and inventory challenges, spiking costs, and potential staffing shortages.
Nike eased many of those concerns this week by marking a return to global sales growth in Q2, which ended in late February. Its holiday season results also helped explain why the company is moving more quickly away from its traditional wholesaling strategy, toward a direct-selling model.
Let's dive right in.
Balanced growth
Nike posted another revenue drop in China, its second-biggest market. Stores there are seeing reduced traffic due to pandemic-related restrictions.
But that division is steadily recovering, and the footwear giant is expanding in Europe and the U.S., so overall revenue rose 8% compared to last quarter's flat result. Management in a conference call said those gains were powered by a flood of innovative product releases, higher prices, and strong demand in the digital selling channel.
Image source: Getty Images.
A big factor in its growth has been fixing the supply chain, too. Nike said in the conference call that it has cut transit delays down by almost four weeks, putting it in a much better inventory position than most of its rivals.
Digital gains
Now we know why Nike is moving even faster away from its traditional model, which involved selling products to retailers like Foot Locker in favor of a direct merchandising approach. That setup carries more inventory and supply chain risks. But it also promises to accelerate growth while boosting profitability.
The digital division expanded to 26% of total sales this quarter, up from 23% a year ago. Nike also logged higher profitability on those e-commerce sales, helping overall gross profit margin rise despite soaring transportation costs.
Those figures help explain why the company is stepping back from its longtime partnership with Foot Locker to deliver more products itself. Still, the old retailing approach isn't going away. "Our wholesale partners continue to play a very important role in our marketplace strategy," CEO John Donahoe said.
Looking ahead
Nike's short-term outlook received a few important upgrades this week. Sure, sales are still on track to grow in the mid-single-digit range, on par with the lowered forecast that management affirmed three months ago. But those gains likely reflect market share growth as peers struggle with more inventory challenges. Nike raised its earnings prediction, too, thanks to higher prices and a reduced rate of customer returns.
The fiscal fourth quarter likely will show weak year-over-year results, mainly because of continued sluggish results out of China. But management is optimistic about the future. The first detailed fiscal 2023 outlook will arrive with next quarter's results, but for now executives say they expect "another year of strong growth."
Investors don't have to take those words just at face value. They're backed up by several positive trends, including rising gross profit margin and improving inventory levels.
It's also a great sign for customer satisfaction that people are returning footwear and athleisure apparel less frequently and are happily paying up for premium products. Those wins will likely translate into faster growth and improving shareholder returns ahead.
