1 billion new reasons to be optimistic about Nike stocks

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Nike (NKE 1.73%) is still reeling from factory closures and other supply chain challenges related to the COVID-19 pandemic. This clogged pipeline was a major feature of its recent earnings report which showed flat sales in the fiscal second quarter of 2022.

But the footwear giant also had good news for investors, including an improvement in its earnings outlook. Executives also confirmed their forecast of modest sales growth for this fiscal year despite headwinds from a new round of economic restrictions in key markets like China and Europe.

Image source: Getty Images.

Keep calm

Nike’s sales were flat from a year ago after adjusting for currency fluctuations. This flat result may seem disappointing at first glance. Rival Lululemon Athletica, after all, saw a 30% jump in revenue in its most recent quarter. But Nike’s performance beat Wall Street targets this time around, as it generated $11.4 billion in revenue (compared to $1.5 billion for Lululemon).

The company saw strong demand trends in the US market, but sales fell sharply in China to bring overall growth to zero. On a conference call with investors, CEO John Donahoe and his team blamed temporary plant closures while saying the broader expansion plan is intact. “Results this quarter were in line with expectations,” given these challenges, Donahoe said.

Higher margins

The news was better in terms of profitability, with gross profit margin jumping 2.8 percentage points to 46% of sales. Nike is capitalizing on strong demand for premium products and a continued shift toward direct-to-consumer sales, which are about twice as profitable as its warehouse retail sales. This success allowed profits to increase by 6%, even though revenues remained stable.

This financial strength has increased cash returns. Shareholders received $1.4 billion from the company this quarter, mostly from $1 billion in share buyback spending.

The dividend payment amounted to $437 million, up 14%. Higher profits also allowed management to spend aggressively on marketing and branding activities, with spending jumping 40% to $1 billion. “We expect these investments to pay dividends as we look to the future,” Chief Financial Officer Matthew Friend said.

Look forward

Executives said the Chinese segment will continue to drag broader activity down this year, but its losses are expected to moderate in coming quarters now that manufacturing capacity has returned to near normal. Investors can expect to see activity in China improve after this quarter’s 24% plunge.

Overall, fiscal 2022 sales are expected to grow at about the same 6% pace that investors have seen over the past six months. This increase is not as strong as the double-digit spike that shareholders expected at the start of the year. But the outlook has not deteriorated since September, even due to supply chain challenges and continued pandemic-related disruptions.

If investors had any doubts about whether Nike is still in growth mode, its rising marketing spend should allay those concerns. With more than $1 billion in branding and promotions this quarter, which management calls “demand generation spending,” this discretionary commitment is up from last year.

Of course, it could take another quarter or two before Nike’s inventory and supply chains get back to normal. But the company is well-positioned for a rebound after those problems disappear – and is aggressively betting on that recovery.

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