Shares of Nike (NKE 0.66%) are down 20% year to date, but at the time of this writing, the stock is up 2.5% since reporting earnings on March 21. The swoosh beat estimates for revenue and earnings per share, and management reiterated its full-year outlook despite inflationary pressures and supply chain obstacles.
Inflation has been a cloud hanging over consumer and retail companies lately. Higher costs to import goods from factories overseas have created uncertainty around near-term profitability, but Nike's latest earnings results show it has the demand for its product to weather the storm.
Let's look at a few details from the latest quarter that showcase this inflation-proof business.
Strong margins
With Nike revenue increasing by 8% year over year on a currency-neutral basis, it's clear consumers are still shopping despite inflation. This rate of growth is not far off the pace from before the pandemic when Nike reported a currency-adjusted revenue increase of 11% in the comparable quarter of fiscal 2019.
Most importantly, gross margin improved by 100 basis points to 46.6% in the quarter. Management attributed this performance to margin improvement in the Nike Direct business and a higher mix of full-price sales.
Here's a big-picture view of Nike's gross margin performance over the last 10 years. It hasn't been smooth, but the figure has firmed up nicely over the last year, just when it needed to the most.
Data by YCharts.
Management's comments during the earnings call suggest that more margin expansion is possible in the near term. "Marketplace demand continues to significantly exceed available inventory supply, with a healthy pull market across our geographies," CFO Matt Friend stated in the earnings report.
Nike Direct, which includes online sales and Nike-owned stores, saw revenue increase by 17% on a currency-neutral basis, while Nike brand digital sales grew 22% over the year-ago quarter. Double-digit growth in the high-margin digital channel could push Nike's gross margin up further over the long term.
Image source: Getty Images.
Hurdling over near-term obstacles
The only negative part of the report to stand out was a decline in earnings per share of 3%. However, this was primarily caused by a higher effective tax rate. Nike's pre-tax income was up 2%. Profits grew slower than revenue due to higher operating expenses for marketing, wage-related expenses, and digital marketing to fuel demand.
Above all, investors are relieved Nike didn't suffer from higher costs in the supply chain, which was the main worry entering the quarter. Management reported that all factories in Vietnam are operational, and nearly all suppliers are operating as usual without restrictions.
Moreover, the company sees inventory supply beginning to improve from here but cautioned that transit times remain elevated. Despite these delays, management still expects revenue for fiscal 2022 (which ends in May) to grow mid-single digits over last year with gross margin expanding 150 basis points for the full year.
"And as we look ahead to fiscal '23, we are optimistic as our brand strength is unparalleled with a strong product pipeline and momentum against our largest growth drivers," Friend said during the earnings call.
Investors who own Nike stock should sleep well, considering this top brand can still deliver solid business performance even when inflation spikes.
