Nike (NKE 0.95%) crushed top- and bottom-line estimates in its fiscal third-quarter earnings report on Tuesday, but that wasn't enough to please the market.
Although the stock was initially trading higher after hours on Tuesday, it closed Wednesday's session down 5% primarily due to concerns about its outlook in the current quarter. While the numbers weren't perfect, the report should remind investors that the company is executing well after a challenging 2022, and the stock continues to look like a long-term buy.
After its latest earnings report, here are three reasons to buy Nike stock now.
1. Demand is still strong
With a surge in inventories last year, Nike has been hit by challenges on the cost side, but revenue growth remains strong for the Swoosh, reassuring investors that there's plenty of consumer demand for its products, even as much of the world is dealing with high inflation and the threat of a recession.
In the fiscal third quarter, revenue rose 14%, or 19% on a currency-neutral basis, to $12.4 billion, which easily beat estimates at $11.5 billion.
Growth was broad-based as Nike Direct sales rose 17% to $5.3 billion, digital sales were up 20%, and wholesale revenue rose 12%.
Geographically, China continued to struggle with COVID-19 lockdowns, but every other region was strong. Currency-neutral revenue was up 27% in North America, 26% in the Europe, Middle East & Africa region, and 15% in Asia Pacific & Latin America. In China, it rose by just 1%. However, for a 50-year-old company like Nike to be growing revenue by 26% to 27% in its core markets is remarkable.
Management credited the success of products like Air Max, its NEXT% running platform, ZoomX, and the Lebron 20, among others.
Unit growth across its product line was 10%, showing robust demand in addition to rising prices from inflation.
As management said, consumer demand "remains uniquely strong," which is particularly impressive in the current global economic environment.
2. Inventory is normalizing
Like a lot of retailers and consumer brands, Nike has struggled with inventory levels over the past year, ordering extra product in anticipation of continued supply chain delays that didn't materialize.
However, after multiple quarters of markdowns and other efforts to control inventory levels, the company seems to have brought it under control. In the third quarter, inventory rose 16% to $8.9 billion, essentially mirroring its 14% revenue growth.
Markdowns did cost the company on the bottom line as gross margin fell 330 basis points to 43.3%, and earnings per share (EPS) declined from $0.87 to $0.79. However, that figure still beat estimates at $0.55.
Nike called for just flat to low-single-digit reported revenue growth in the fourth quarter as it scaled back inventory commitments in the spring and summer due to its earlier problems. However, that decision should help shore up margins going forward, and investors should expect gross margins to steadily rebound.
3. Nike is gaining market share on rivals
Nike's two closest rivals, Adidas and Under Armour, have diminished in recent years, but the recent quarter underscores how wide Nike's lead has become.
Adidas reported currency-neutral revenue growth of just 1% in 2022 and a decline of 1% in the fourth quarter due in part to the termination of its Yeezy partnership with Kanye West.
For the year, Adidas reported an operating margin of just 3%, and it had an operating loss of 724 million euros in the fourth quarter. In 2023, management expects performance to weaken further as it aims to reduce inventory after inventories finished up 49% at the end of the year. It also called for a currency-neutral revenue decline in the single digits and for break-even adjusted operating profits.
Meanwhile, Under Armour posted just 3% revenue in its most recent quarter, or currency-neutral revenue growth of 7%. That growth was driven by the Europe, Middle East, and Africa segment, while revenue in North America, where the majority of its sales comes from, was down 2%. It's also struggled with a promotional environment as the gross margin fell 650 basis points in the quarter to 44.2%.
Adjusting for restructuring charges in the quarter a year ago, operating income declined.
Based on those numbers, it's clear that Nike isn't the only sportswear stock experiencing challenges with excess inventory and markdowns, but it's outgrowing those two peers by a mile, and given their challenges, it looks poised to grab more market share in 2023 as well.
