Nike (NKE 0.72%) investors were worried heading into the company's fiscal fourth-quarter earnings announcement. The biggest fears surrounded weak sales, declining profitability, and potentially soaring inventory levels heading into the new fiscal year.
While the footwear giant did report worsening trends in all of these areas, results weren't as bad as many investors had feared. The management team also issued a bullish outlook for the new year that implies the recent operating slump was tied to temporary issues like supply chain challenges and COVID-19 lockdowns in China.
Let's take a closer look.
Positive sales trends
Nike's sales dropped 1% to 12.2 billion, which was right in line with what most investors had predicted heading into the announcement. Sure, that decrease isn't nearly as impressive as the 32% revenue spike that rival. But Nike had a few challenges that were more specific to its business through late May.
The China market, which is a huge portion of its global business, declined 20% as pandemic-related lockdowns pressured sales trends. Yet Nike still managed a small uptick in worldwide sales after accounting for currency exchange swings. "Nike's results...are a testament to the unmatched strength of our brands and our deep connection with consumers," CEO John Donahoe said in a press release .
Costs and cash
The profit picture wasn't bad, either. Nike's gross profit margin declined by less than 1 percentage point, which should be considered a win given all the rising costs on everything from transportation to labor. Nike overcame these challenges, along with a one-time write-down on obsolete inventory in China, to keep gross profitability steady.
Management spent more aggressively on stock buybacks and dividend payments, but cash holdings were still ample at $13 billion. The company continued to make the sorts of moves you would expect for a business that sees a long runway for growth ahead.
It invested heavily in its digital infrastructure, in its new product innovation research, and in marketing. These initiatives back up management's claim that they're seeing robust consumer demand even though some parts of the business are shrinking.
Nike's outlook for the new fiscal year ahead was positive. Management says the groundwork has been laid for another record sales year, with production, inventory, and supply chain challenges all largely fixed.
That inventory note contains a risk, though, given that inventory holdings soared 23% in Q4. Most of that spike was simply a factor of higher transportation times, as more of its products were in transit at this point than they were a year ago. Yet it still could become a liability if consumer demand trends worsen quickly.
Nike's forecast doesn't envision such a sharp downturn ahead. Instead, revenue should grow at a double-digit rate for fiscal 2023. Profitability will take another small step lower in Q1, executives said, before recovering through the rest of the year thanks to the healthy balance today between inventory and demand.
Nike's new product releases in fiscal 2023 might make the difference in determining whether the company meets those ambitious targets. To date, consumers seem eager to spend on these innovations even as prices rise. We'll soon find out if that enthusiasm will hold up into the holiday shopping season ahead.