Nike (NKE -1.00%) Investors were worried ahead of the company’s fiscal fourth quarter earnings announcement. The biggest fears were about weak sales, declining profitability and potential skyrocketing inventory levels as the new fiscal year approaches.
Although the footwear giant reported worsening trends in all of these areas, the results weren’t as bad as many investors feared. The management team also issued an upbeat outlook for the new year, implying that the recent operational downturn was linked to temporary issues such as supply chain challenges and COVID-19 lockdowns in China.
Let’s take a closer look.
Positive sales trends
Nike sales fell 1% to 12.2 billion, which was exactly what most investors had predicted before the announcement. Of course, this drop isn’t nearly as impressive as this rival’s 32% revenue spike. But Nike had a few more business-specific challenges through the end of May.
The Chinese market, which accounts for a significant portion of its global business, fell 20% as pandemic-related lockdowns put pressure on sales trends. Yet Nike still managed a slight increase in global sales after accounting for currency fluctuations. “Nike’s results…are a testament to the unparalleled strength of our brands and our deep connection to consumers,” CEO John Donahoe said in a press release.
Costs and Cash
The earnings picture was not bad either. Nike’s gross profit margin shrank by less than 1 percentage point, which should be considered a win considering rising costs on everything from transportation to labor. Nike overcame these challenges, along with a one-time writedown on obsolete inventory in China, to keep gross profitability stable.
Management spent more aggressively on share buybacks and dividend payments, but cash was still ample at $13 billion. The company has continued to take the steps that are expected of a company that sees a long streak of growth ahead.
It has invested heavily in its digital infrastructure, in its search for new product innovation and in marketing. These initiatives support management’s assertion that it is seeing strong consumer demand, even as parts of the business decline.
Nike’s outlook for the upcoming new fiscal year was positive. Management says the groundwork has been laid for another year of record sales, with production, inventory and supply chain issues all largely resolved.
This inventory note contains a risk, however, given that inventories soared 23% in the fourth quarter. Most of that spike was simply due to longer transit times, as more of its products were in transit at this point than they were a year ago. Yet this could still become a liability if consumer demand trends deteriorate rapidly.
Nike forecasts do not see such a sharp downturn in the future. Instead, revenue is expected to grow at a double-digit rate for fiscal 2023. Profitability will drop a little further in the first quarter, executives said, before recovering through the rest of the year on the back of good current balance between stocks and demand.
Nike’s new product launches in fiscal year 2023 could be the difference between whether the company meets these ambitious goals. To date, consumers seem willing to spend on these innovations even as prices rise. We’ll soon find out if that excitement will carry over into the upcoming holiday shopping season.