Nike (NKE 0.36%) posted its latest earnings report on March 21. For the third quarter of fiscal 2023, which ended on Feb. 28, the athletic footwear and apparel company's revenue rose 14% year over year (and grew 19% in constant currency terms) to $12.4 billion and beat analysts' estimates by $910 million. Its net income declined 11% to $1.2 billion, or $0.79 per share, but still cleared the consensus forecast by a quarter.

Those growth rates look stable, but Nike's stock dipped after the report and remains down about 8% over the past 12 months. Will this blue-chip stalwart bounce back and head higher over the following year?

A pair of Nike sneakers.

Image source: Nike.

A strong recovery in fiscal 2023

Back in fiscal 2022 (which ended on May 31, 2022), Nike's post-pandemic recovery stalled out as it encountered COVID lockdowns in China, supply chain disruptions, and inflationary headwinds. Its revenue rose only 6% in constant currency terms that year, decelerating significantly from its 17% growth in fiscal 2021.

Yet Nike's business stabilized in fiscal 2023. The growth of Nike Direct, which houses its e-commerce and brick-and-mortar stores, accelerated and offset the slower growth of its wholesale channels. Nike Direct brought in 43% of its total revenues in the third quarter, compared to 42% a year ago. Its stronger sales in North America, Europe, and other markets also offset its softer sales in China. That's why Nike generated double-digit revenue growth again over the past three quarters.

Period

Q3 2022

Q4 2022

Q1 2023

Q2 2023

Q3 2023

Nike Direct Revenue Growth (YOY)

17%

11%

14%

25%

22%

Total Revenue Growth (YOY)

8%

3%

10%

27%

19%

Data source: Nike. Constant currency basis. YOY = year over year.

However, Nike expects to generate "flat to low single-digit" revenue growth in the fourth quarter, as its wholesale business remains weak. For the full year, the company expects its revenue to grow by the high single digits on a reported basis and the low teens on a constant currency basis.

It partly attributes that slowdown to a reduction in inventory commitments for its spring and summer seasons -- which it implemented half a year ago to ensure that inventory levels remain stable as the company grapples with slower consumer spending and higher supply chain costs. Inventories rose 16% year over year (but declined 5% sequentially) in the third quarter.

Analysts expect Nike's reported revenue to rise 7% for the full year. For fiscal 2024, they expect its revenue to grow 8%. Therefore, Nike is in much better shape than its rival Adidas (OTC: ADDYY), which is expected to post a 7% revenue decline in 2023 as it grapples with the loss of Kanye West's Yeezy brand, sluggish sales in China, and other macro issues.

But Nike's margins are still under pressure

Nike's revenue is rising and its inventory is stabilizing, but the gross margin fell 330 basis points year over year (though it rose 40 basis points sequentially) to 43.3% in the third quarter. That year-over-year compression was caused by higher production costs, elevated logistics expenses, and more aggressive markdowns for its lower-end products. The company expects that pressure to persist in the fourth quarter and its gross margin to slide from 46% in fiscal 2022 to about 43.5% in fiscal 2023.

Nike is trying to soften that blow by reducing its marketing costs and buying back more shares, but analysts still expect its EPS to drop 16% this year before potentially rising 26% in fiscal 2024. But once again, Nike is faring better than Adidas, which is expected to post a massive net loss this year as it wades through a glut of unsold Yeezy products.

Nike's stock still isn't a screaming bargain

Nike's long-term prospects still look bright. But its stock isn't cheap at 30 times next year's earnings, and its paltry forward yield of 1.1% won't attract any serious income investors. Its valuation has likely been buoyed by its reputation as a safe blue-chip play for a bear market, but that will also limit its near-term growth potential.

Therefore, I believe Nike's stock will likely continue to trade sideways over the next 12 months. So for now, investors should stick with other more reasonably valued stocks until a new bull market starts and brings more buyers back to Nike.