Nike (NKE -1.26%) investors are about to get valuable clarity about the health of its business. The footwear and apparel giant will announce its fiscal fourth-quarter results after the market closes on Monday, June 27, and there are huge questions swirling around that announcement.
Nike likely saw slowing demand in key markets like the U.S. in Q4, after all, as inflation pressured consumer spending. It's also possible that the company was surprised by that shift, as other retailers have been, putting it in a tough inventory position today.
Shareholders are also keen to learn whether CEO John Donahoe and his team are projecting solid growth for the new fiscal year, which has just started. Let's take a closer look.
The sales trends
Rival Lululemon Athletica set a high sales bar in its latest earnings announcement. The chain said back in early June that revenue jumped 32% in the selling period that ended in early May, beating Wall Street's expectations.
Investors are less enthusiastic about Nike's short-term growth potential, and most Wall Street pros are looking for sales to decline 1% to roughly $12.2 billion.
A big factor in that drop is Nike's international footprint, which counts heavily on markets like China and Europe to provide sales gains. Revenue in these regions likely shrank even as Nike's U.S. division slowed down compared with booming growth in the year-ago period.
Warning flags
While China and Europe should rebound over time, there could be other warning signs in Nike's report. Shoppers may have become more price conscious in recent months as inflation eats away at their purchasing power. Nike shouldn't be hurt much by this shift, given its premium positioning. But the gross profit margin might still fall.
NKE Gross Profit Margin data by YCharts
This key metric has been rising lately, thanks to Nike's aggressive product launch schedule and its shift away from using retailing partners like Foot Locker. Yet, Nike's profitability is under threat from soaring expenses in areas like transportation, labor, and manufacturing inputs.
Looking ahead
Keep a close eye on Nike's inventory levels as a big jump here might portend price cuts on the way. Other national retailers haven't reported collapsing demand for athleisure apparel, but it's still possible that Nike will have to discount some merchandise over the coming months, just as Target is planning to do.
Looking ahead, investors should get a good idea about Nike's short-term growth potential when management issues its official fiscal 2023 forecast. Wall Street is currently looking for sales to rise by about 11% in the period which just began, compared with a roughly 5% increase in fiscal 2022.
Nike should get a boost from the Chinese market emerging from COVID-19 lockdowns and from continued strong demand for new footwear releases. But the big question is whether executives see demand slowing significantly heading into the holiday season. The risk from that slowdown would be amplified by rising inventory levels -- and declining profitability -- heading into fiscal Q1 and Q2.
