Christmas arrived early for Nike’s stockholders this year.
On Tuesday, the athletic footwear and apparel maker reported solid fiscal 2023 financial results that beat analysts’ expectations, sending its shares sharply higher in after-hours and on Wednesday’s trade.
Earnings per share came at 85 cents, well ahead of analysts’ expectations of 64 cents. In addition, revenues came at $13.3 billion, up 17% from a year early and ahead of expectations of $12.57 billion.
That’s due to solid growth in NIKE Direct sales, up 16% from a year earlier, and a 25% growth in NIKE Brand Digital sales.
Nike’s senior management joined Wall Street in cheering the company’s solid performance, attributing it to the “deep” connection between the brand and its customers.
“NIKE’s results this quarter are a testament to our deep connection with consumers,” said John Donahoe, Nike’s President and CEO. “Our growth was broad-based and was driven by our expanding digital leadership and brand strength. These results give us confidence in delivering the year as our competitive advantages continue to fuel our momentum.”
Chief Financial Officer Matthew Friend was on the same page.
“Consumer demand for NIKE’s portfolio of brands continues to drive strong business momentum in a dynamic environment,” he said. “We remain focused on what we can control, and we are on track to deliver on our operational and financial goals — setting the foundation for sustainable, profitable growth.”
One of the things the company controls is how to distribute its products. A couple of years ago, Nike shifted to a direct-to-consumer distribution model from a wholesale distribution model, helping the company better connect to its customers while boosting gross margins.
Another thing the company controls is investing in mobile technologies to personalize its products to address customers’ demands better.
Direct connection with customers, digitalization, and personalization are three new additions to Nike’s conventional advantages, like branding, scale, and scope that form “moats” around its business, making it hard for new competitors to invade its markets.
At the same time, these barriers to entry let Nike deliver plenty of value to its capital holders, as measured by economic profit — the difference between the return on invested capital (ROIC) compared to the weighted average cost of capital (WACC).
According to estimates by GuruFocus, Nike’s current ROIC is 28.03%, while its WACC is 7.23%, leaving the company with an economic profit of over 20%.
But there are several things that the company doesn’t control, like the persistent covid problems in China that have been hurting sales.
Then there’s the challenging macroeconomic environment in the U.S. and Europe, the multiyear level high inflation, and the rising interest rates, which hold consumers back from buying premium brand products.
These challenges have left Nike with plenty of undesired inventories in recent quarters, putting pressure on margins and tapering Wall Street’s enthusiasm for the company’s solid second-quarter results.
“While Nike has exceeded Wall Street expectations in the past three quarters, it has faced challenges with inflated inventory levels due to supply chain disruptions, increased consumer demand, and unpredictable shipping times,” Mina Tadrus, CEO of Tadrus Capital, told International Business Times.
“Inventories rose 43% to $9.3 billion in the quarter compared to the previous year, leading to discounted prices and a decline in gross margin to 42.9% from 45.9% the previous year,” Tadrus said.