Nike (NKE -0.74%) shares jumped in the immediate wake of the company's fiscal Q2 report, which runs through the beginning of the all-important holiday shopping season. Wall Street pros were happy to see sales trends accelerate into late 2022 despite growing pressures on consumer spending.
That earnings announcement featured some bad news, including declining profitability and elevated inventory levels. But the report implies good returns ahead for the business. Let's take a closer look at three key things for investors to know about Nike as we approach 2023.
Demand is strong
Nike executives said three months ago that its Q1 sluggishness was just due to short-term issues rather than weaker demand for its products. This Q2 report adds support to that bullish thesis.
Sales growth accelerated to a blistering 27% after accounting for currency exchange rate shifts compared to just 10% in the prior quarter. The Chinese market returned to growth and the U.S. geography showed strength, too, with sales jumping 30%.
This rebound put Nike firmly in growth mode, consistent with popular rivals like Lululemon Athletica (LULU -1.26%), which recently posted a 31% sales increase. "Consumer demand," Nike CFO Matthew Friend said in a statement, "continues to drive strong business momentum in a dynamic environment ."
Earnings will decline
At the same time, Nike isn't past the worst of its earnings pressures. Executives said profits were hurt by several negative factors, including rising expenses and a promotional selling environment in the U.S. market. Gross profit margin dropped by 3 full percentage points to 43% of sales as markdowns impacted the bottom line.
NKE Operating Margin (TTM) data by YCharts
Still, Nike remains highly profitable. Net income landed at $1.3 billion, roughly even with a year ago. Earnings per share ticked up by 2% thanks to a declining share count. This success means investors have good reasons to expect the footwear giant to continue generating strong profits and cash flow in 2023, even if economic growth rates continue slowing.
The future is bright
The strong performance through the selling period that ended in late November points to a good finish for Nike in its 2023 fiscal year. Management said in a conference call that they reached their ambitious inventory targets this past quarter, making improvements in the level and quality of inventory. This success lays the groundwork for faster growth and stronger margins ahead now that inventory is more in line with demand trends.
In fact, Nike now sees revenue rising at a low-teen percentage rate in 2023, up from the prior forecast of low double-digit growth.
That upgrade puts further heft behind executives' claim that Nike's new products are resonating with consumers, even though there are pockets of weakness around the portfolio .
The company is still expecting gross profit margin declines for the full year thanks to those price cuts it has been using to clear out excess inventory.
But smart investors can look past that short-term challenge toward what might be a great end to fiscal 2023. Assuming no sharp drop in consumer spending patterns, Nike is on track to start posting strong growth and improving margins over the next several quarters.
