Earlier this month, footwear and athletic apparel giant Nike (NKE 0.66%) reported its latest results. The numbers for its fiscal 2022 third quarter were strong, beating analysts' expectations for both earnings and revenue. It was a solid showing for a company that many investors were worried would be in tough shape given the current high inflation levels and the supply-chain issues plaguing its industry.
However, the picture isn't all rosy for the company. In just a couple of charts, investors can see that there are some concerns around Nike right now, and those make it difficult to justify the stock's high price tag.
Image source: Getty Images.
Sales fell for the third straight quarter
Nike sales in its fiscal Q3, which ended Feb. 28, grew 5% year over year to $10.9 billion. The company boasted that its direct-to-consumer sales rose 15% to $4.6 billion. But that growth looks less impressive when compared to recent quarters. The top line has been falling sequentially for three consecutive quarters now. Sales have also been falling in its two largest markets -- North America (down for three straight periods) and Europe, Middle East & Africa (down in the past two quarters).
Source: Company filings. Chart by author.
Sales could weaken even further in future quarters as the U.S. benchmark interest rate is now officially on the rise, and in light of the Russian invasion of Ukraine which is disrupting operations in Europe for many businesses. Meanwhile, in the Greater China market -- the only one where Nike showed strong growth last quarter -- a surge in COVID-19 cases has led the government to re-institute lockdowns in the major city of Shanghai that will run through April 5.
Inventory is piling up
For Nike, a decline in demand could exacerbate another issue: rising inventory levels. One important number that investors may have overlooked in the company's fiscal Q3 report is its inventory level. Inventories rose to $7.7 billion -- their highest level at any time in the past four years.
Source: Company filings. Chart by author.
This is a concern because while management may state that demand is strong, it also noted on its latest earnings call that transit times have been worsening. And given the headwinds noted above, these issues may not ease up anytime soon. By the time its products get to retailers, demand for them could soften up, especially in a period of inflation and rising interest rates.
In the meantime, the company is facing expenses related to holding all that inventory. If Nike ends up with an excess of supply, it could choose to mark down prices in an effort to move some of it, which would hurt its margins.
Is Nike a buy despite these challenges?
Nike is a solid business, and its athletic gear is popular worldwide. But the problem right now is that its sales aren't growing, and there could be some tough times ahead. It could still be an attractive stock to hang on to for the long term, but investors may be better off waiting for the price to dip further. The stock has experienced some notable ups and downs over the past 12 months, but at the moment, it's essentially flat compared to where it was a year ago, while the S&P 500 is up by 14%.
At a forward price-to-earnings multiple of 36, Nike is by no means a cheap buy. Investors are often hesitant to pay such high multiples unless a business is experiencing significant growth. Nike isn't. So the safest thing for investors may be to just stay on the sidelines for now.
