Investors had all but abandoned Nike (NKE -0.34%) stock through most of 2022. Shares dove nearly 40% through late December on fears of a sales slowdown and declining profitability well into 2023.
The footwear and apparel giant eased those concerns in its final earnings report of the year, revealing on Dec. 20 that demand trends accelerated into the start of the holiday shopping season. But that's just one good reason why Nike is an attractive growth stock to consider adding to your portfolio.
Let's dive right in.
Back in growth mode
Nike's growth stock status fell into question a few months ago when the company announced a weak start to its fiscal 2023 year. Sales rose just 10% through late August after accounting for currency exchange rate shifts, in fact, which looked weak compared to peers like Lululemon Athletica. That expansion rate also suggested major inventory challenges were ahead as the company cut prices in response to slow-moving merchandise trends.
But Nike is clearly back in expansion mode. Sales growth sped up to 27% through late November, indicating its latest releases met with a healthy footwear and athleisure apparel industry. "Nike's results this quarter are a testament to our deep connection with consumers," CEO John Donahoe said in a statement as the company raised its growth outlook for fiscal 2023.
Better inventory
Investors might be worried to see inventory levels spike again, jumping 43% to $9.3 billion. However, that metric isn't nearly as frightening as it might initially seem.
Most of the surge has to do with temporary factory shutdowns last year and an accelerated timetable for deliveries ahead of the spring selling season. In a call with investors, management said they've cleared most of the excess inventory in the key U.S. and Chinese markets.
In fact, the inventory burden is the lowest it has been in a year, and Nike's current holdings aren't as tilted toward slow-moving or outdated merchandise, which were cleared out by promotions in recent weeks. "We are confident that our decisive actions have put us on the right track," CFO Matthew Friend said.
Looking ahead
Inventory pressures aren't totally gone, though, and Nike is still expecting its gross profit margin to drop this fiscal year. But sales trends are accelerating into 2023 right when temporary challenges like exchange rate shifts and promotions will be lifting.
That means Nike could be posting faster sales trends and improving earnings in a few quarters even if the global economic environment doesn't improve. Sure, a recession would challenge that bullish short-term thesis. But Nike's growth rebound, along with its far-improved inventory condition, makes it more likely that the company will lead the industry again in key metrics like earnings and cash flow.
As a result, you might consider adding this growth stock to your watchlist, especially after its decline in 2022. Sales don't occur often on blue-chip giants like Nike, and they don't come around in periods of exuberant optimism. But discounts like these tend to look like steals when you look back in a few years once the volatility and economic uncertainty have passed.
