The past year was a wild one for shareholders, but at least Nike ended it on a strong note. The business returned to growth in each of its key regions through November, management said in late December.
Nike at the time boosted its cautious outlook, though at the same time it warned investors to brace for volatility thanks to rising pandemic limits on shopper traffic and continued supply chain disruptions. Those issues might pressure results for the fiscal third-quarter report, set for March 18, but shouldn’t have any long-term impact on Nike’s growth prospects.
Let’s take a closer look.
Sales trends
CEO John Donahoe and his team celebrated Nike’s improved posture last quarter, and they backed up that claim with strong growth metrics. Sales inched higher in the U.S. market just two quarters following a 46% dive during COVID-19 lockdowns. China, its other main growth market, grew 19% after currency exchange swings are adjusted for. “Nike’s results during a dynamic environment show the power of staying on the offense,” Donahoe said.
NKE Revenue (Quarterly YoY Growth) data by YCharts
The fiscal third quarter started in early December, meaning it covers most of the key holiday shopping surge. More growth improvements are expected, but that success will depend on Nike executing well on pricing, inventory, and supply during the peak volume period. Most investors are betting on a continuing growth rebound, with sales rising 9% this quarter.
Profit pinches
The news wasn’t as positive on earnings last quarter. Rising expenses and elevated inventory levels hurt profitability through the fall selling months. Net income still rose in Q2, but that increase was mainly due to a slump in marketing and advertising costs that’s not expected to repeat itself now that sporting events are running again.
Nike also entered the holiday period with higher inventory than normal, and so executives predicted another weak outing for gross profit margin. Yet the bigger picture trend is positive on this score, especially as demand keeps tilting toward those highly profitable e-commerce sales.
Nike gets almost twice as high a margin from direct-to-consumer sales as it does from bulk sales to retailers. A steady drumbeat of innovative footwear and apparel launches should combine with this shift to push Nike’s margins significantly higher over the next few years.
The new outlook
Donahoe said in December, during a global surge in COVID-19 cases, that the short-term outlook was unusually cloudy. That uncertainty was reflected in Nike’s decision to limit inventory purchases and pause stock buyback spending. The company saw plenty of reasons to be optimistic about the broader recovery, even if the next few quarters will be volatile.
We’ll find out this week whether some of those clouds have lifted. Sure, the fiscal fourth quarter will be an easy one for Nike given that sales dove almost 50% in the year-ago period. But Nike’s updated outlook should show whether management believes the company will start setting annual earnings and sales records again in the next year or that it might take more time to work through the demand and supply chain disruptions from the pandemic.
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