What happened

Sneakers and sportswear maker Nike (NKE -0.34%) outran earnings expectations in its fiscal Q2 2023 report last night, and Nike stock is off to the races Wednesday morning. Instead of the $0.65 per-share profit and $12.6 billion revenue that analysts had forecast, Nike said it earned $0.85 per share, and its quarterly revenue topped $13.3 billion.

Nike's stock is rushing ahead 13.7% as of 10:10 a.m. ET.  

So what

Q2 sales surged 17% year over year for Nike, and if it weren't for the company's contending with unfavorable exchange rates on its sales, growth would have been even higher -- 27%.

Yet even so, the news wasn't all good.  Gross profit margins on those sales plunged 300 basis points, to 42.9%. Nike counteracted this decline in gross profitability by restraining cost growth in advertising and overhead costs, but even so, pretax income grew only 10% -- much slower than sales growth. Complicating matters further, Nike suffered a surge in income tax assessments, which nearly doubled year over year.

When all was said and done, earnings per share inched up only 2% year over year. That was enough to beat estimates, but still a bit of a disappointment in light of how fast sales grew.

Now what

Nevertheless, Nike doesn't set tax policy, so you can't really blame the company for this bottom-line result. As management says, Nike will instead "remain focused on what we can control" -- keeping costs in check, growing sales, and buying back shares to keep per-share earnings growing even in the face of flat net earnings.

If not for these efforts, earnings probably would have been either flat, or actually declined, for the quarter.

As for the future, Nike didn't give specific guidance for what it expects over the balance of fiscal 2023. Management did not say, however, that it has made progress in rightsizing its inventories, which should enable it to do less discounting and raise its profit margins somewhat going forward. Management further expressed the hope that unfavorable foreign exchange rates will reverse at some point, which could turn today's FX headwinds into tailwinds for both revenue and earnings growth.  

In the meantime, however -- and despite today's positive stock market reaction to the earnings news -- I just can't recommend an investment in Nike stock. Valuation is nearly 29 times trailing earnings, and with long-term earnings growth still estimated in the single digits (about 7.5%, according to analysts polled by S&P Global Market Intelligence), that's simply too high a price to pay for Nike.