Athletic apparel company Nike (NKE 0.19%) delivered a positive earnings report last week that beat analysts' expectations. Earnings per share of $0.95 came in higher than Wall Street's $0.75 consensus. But simply outperforming expectations doesn't mean the company is immune to the current macroeconomic conditions and it'll be smooth sailing for the business as other retailers struggle.
While the stock is down 19% year to date, here's why investors should think twice before buying the dip.
1. Digital sales growth wasn't strong
An encouraging source of growth in previous periods was Nike's digital sales numbers. For fiscal 2023, which ended May 31, the apparel company reported Nike brand digital growth of 24%. And Nike direct revenue rose 14% (or 20% when excluding the impact of foreign currency).
Digital and direct sales numbers are important as they come with better margins. But in the company's fiscal 2024 first quarter (ended Aug. 31), Nike direct revenue was up only 6% year over year, and digital sales rose just 2%. That's a steep drop in those key growth rates.
Total sales of $12.9 billion were also up only 2%, extending an ongoing streak of declining quarterly growth for the company.
Data by YCharts.
2. Inventory of $8.7 billion remains high
Nike and other retailers have been dealing with elevated inventory levels for a while now, and that remains a problem today. While inventories in the fiscal first quarter were down 10% year over year, they were higher than the $8.5 billion Nike reported three months ago. And they remain well above the company's 5-year average:
Data by YCharts.
This is problematic because it means there will likely be a continued need for Nike to increase discounts to get its products moving. And that can shrink its already thinning margins.
3. Gross margins of 44% could go lower
Nike's gross margins bounced back a bit last quarter, but they are still lower than where they were a few quarters ago.
Data by YCharts.
Elevated inventory levels and slowing direct-to-consumer growth may lead to even worse margins in the quarters ahead. If that happens, that could put a strain on Nike's bottom line.
Nike isn't worth the premium
Shares of Nike have been falling this year, but at close to 30 times earnings, the stock is still trading as if it were growing at a high rate. That isn't the case, and it could be a while before it gets back to generating stronger sales numbers. The resumption of student loan payments this month also presents a new headwind for the company and its premium products.
Nike's pre-tax profits totaled $1.6 billion last quarter and declined 10% year over year. Although earnings beat Wall Street's expectations, that doesn't mean Nike has become a good buy or that its profits are truly rising. There are still plenty of red flags for investors to consider, and as long as they remain, investors should stay on the sidelines and avoid this overpriced retail stock.
