Nike Inc. (NYSE: NKE) dominates the sports footwear market, leading in all major categories. With more than 1,000 stores, as well as 6,000 stores operated by franchisees, the company sells more than 800 million shoes annually in more than 190 countries.
With the With the exception of 2020, when sales were crippled by the pandemic, Nike has increased revenue every year, starting in 2010. During this period, the company’s annual revenue more than doubled, while EPS has more than tripled.
The company struggled with factory closures and supply chain issues, but Nike still managed to beat 2019 results by a wide margin in 2021.
Much of the company’s recent success can be attributed to an increased focus on direct-to-consumer (DTC) sales. DTC helped boost third quarter results, supporting the stock. Even so, stocks are down about 19% year-to-date.
A Look at Nike’s Recent Earnings
After the second quarter results, Nike shares began a three-month decline.
In mid-March, Nike hit a 52-week low, but shares have rebounded nearly 15% since then. The upside was boosted when Nike provided third quarter 2022 results on the 21st of this month, beating analysts’ estimates on the top and bottom results.
EPS of $0.87 beat consensus by 16 cents and revenue of $10.87 billion was well above the $10.59 billion expected. Net income was $1.4 billion from $1.45 billion a year earlier.
Sales increased 5% year over year to $10.87 billion, and gross margins edged up to 46.6% from 45.6% in the comparable quarter.
The Nike Direct segment saw sales growth of 17% year over year. The results included a 22% gain in digital business and a 14% increase in sales from Nike-owned physical stores. Digital sales from its North American business were particularly robust, jumping 33%.
Nike reported a 13% increase in selling and administrative expenses.
Sales in China fell 8% compared to the comparable quarter of 2020; however, this is an improvement from the second quarter, when sales fell 24% year-over-year.
The Yin and Yang of Nike China
About a year ago, a controversy erupted regarding Nike Release of a statement regarding the forced labor of Uyghurs in Xinjiang province. State-controlled media and government officials have come to the defense of the country.
For companies that affect our country’s bottom line, the answer is very clear: don’t buy!
central china Television
This was followed by the Chinese actors Wang Yibo and Tan Songyun, who together have 61 million Weibo followers, have terminated their contracts with Nike.
In addition, Dewu, the largest sneaker resale site in China, deleted all Nike products on its platform.
A boycott of Nike products ensued and, according to a Wall Street Journal articlea study indicated that one in three Chinese consumers are less likely to purchase Nike products due to hubbub.
The boycott, combined with supply disruptions from Vietnam and restrictions related to a resurgence of COVID, had decidedly negative effects on results.
During the third quarter 2021 earnings call, management announced that in Greater China, the company had “achieved its second consecutive quarter of $2 billion and grew 42% on a currency-neutral basis.”
In the following quarter, growth slowed to 9% in Greater China, and in the first quarter of 2022, growth was an anemic 1% in this country. This was followed by a 24% drop in the second quarter of 2022 and an 8% drop in the last quarter.
Chastised CEO John Donahoe made amends on the fourth quarter 2021 earnings call:
And today, we’re the biggest sports brand out there, and we’re a brand from China and for China.
While some degree of damage was done, it’s proven to be nothing more than a pretty significant speed bump on Nike’s journey to dominance in China.
Nike was recently ranked as the No. 1 Cool Brand and No. 1 Favorite Brand in China. The company is also ranked as the number one sports brand on Tmall, a Chinese-language website for business-to-consumer online retail, and the third most visited website in the world.
Success in China is imperative for Nike, given that the company has enjoyed seven consecutive years of double-digit growth in the country at the end of the fourth quarter of 2021 and achieves around a fifth of its business in the mainland.
With 7,000 single-brand stores in China, Nike also ranks as Greater China’s largest sports brand.
The Direct To Consumer initiative
In 2017, Nike launched the Consumer Direct Offense. Management began to focus on direct-to-consumer sales while cutting ties with a number of physical retailers. In 2017, Nike had 30,000 retail partners: in 2019, this number was reduced to forty.
Arguably, the real pivot point came in 2019 when Nike pulled its products from Amazon (AMZN). It would have been reasonable to question this decision; however, fast forward to the last quarter, and direct sales now account for over 42% of total revenue.
In fact, Nike Digital sales grew 19% in the last quarter alone. Additionally, the company is earning an additional ten points of gross margin on digital channel sales compared to wholesale, bolstering its bottom line.
Nike’s SNKRS serves to showcase the company’s success in DTC. In the first quarter, demand in the SNKRS app grew by more than 130%. With a global reach, the app is currently available in 50 countries, a testament to the strength of the Nike brand.
At the end of last year, Nike announcement the acquisition of RTFKT, a virtual sneaker company. This represents Nike’s foray into the metaverse. The deal gives Nike a vehicle in the non-fungible token (NFT) market.
Prior to the deal, Nike had filed trademark applications related to virtual brand sneakers and apparel.
I freely admit that the potential future value of this acquisition escapes me. I have to wonder if this is a trend that will eventually rank alongside the fads every generation adopts in their youth only to cringe decades later.
However, while I and others are collectively scratching their heads in an effort to understand the ramifications of this movement, it should be noted that a collaboration between FeWoCious and RTFKT transported in $3 million, with the two virtual sneaker editions sold at $3,000, $5,000, and $10,000.
Shortly before the RTFXT deal, Nike in partnership with Roblox (RBLX) to build Nikeland. Nikeland will serve as a virtual world where, among other things, people can dress their avatars in Nike-branded gear.
About two weeks ago, it was revealed that 6.74 million people from 224 countries had visited Nikeland since opening its virtual doors five months ago.
… During NBA All-Star Week, LeBron visited NIKELAND on Roblox to inspire his community toward in-game physical movement. On the NIKELAND court, LeBron coached and interacted with players, and attendees were rewarded for their physical gameplay with the ability to unlock virtual goods.
John Donahoe, CEO
Key indicators of NKE shares
The company’s debt rating is A1 stable by Moody’s.
Nike’s current yield is 0.91%. The payout ratio is 30.61% and the 5-year dividend growth rate is 11.27%. Management’s objective is to maintain a dividend distribution range of 25% to 35%.
The company has a four-year, $15 billion share buyback program in effect, having repurchased shares valued at $1.2 billion last quarter.
Nike is trading at $133.52 per share. The 12-month average price target of the 30 analysts who rate the stock is $171.67. The price target of the eight analysts who rated the stock following the last quarterly report is $167.88.
Nike has a forward P/E a hair below 36x. This is slightly above its five-year average P/E ratio of 35.35. The company’s forward PEG is 2.27x, in line with its historical PEG of 2.30x.
Is the NKE share a buy, sell or hold?
Like most retailers, Nike has struggled with store closures, government restrictions and supply chain issues following the onset of COVID-19. However, many experts believe the pandemic has increased consumer engagement with the company’s DTC business.
In 2015, Nike generated $1.5 billion in online sales. Last quarter, Nike Direct sales were $4.6 billion and are growing at a double-digit rate.
In addition, direct sales offer higher margins, which boosts company profits.
The company’s struggles in Greater China are likely transitory, and Nike will likely experience growth there for the foreseeable future.
As stated in this article, Nike is the dominant force in its industry. The business is also very profitable, with gross margins over the past decade reaching the mid-40s.
Unfortunately, while the multiple benefits associated with an investment in Nike mean the stock is a relatively safe long-term investment, these truths are generally known to savvy investors.
Therefore, even though Nike is trading near its 52-week low, both futures and PEG stock prices are in line with historical averages, indicating that the stock price is rather high.
Therefore, I rate NKE as a HOLD.