Nike Earnings Crush and Stock Falls

Nike (stock NKE), one of the largest footwear and apparel giants in the world, beat earnings estimates for its fiscal third quarter, but the excess inventories weighed on the margins, causing NKE stock to fall early Wednesday.

The company, which is a bellwether for the global consumer economy, hiked its full-year revenue guidance, but warned that margins would continue to be under pressure.

What to Expect from Nike

Analysts polled expected Nike to post a 36% decline in earnings per share (EPS), year over year, to 56 cents. However, the company reported earnings of 79 cents a share, down 9% but still a far less-than-feared decline. The revenue jumped 14% to $12.39 billion, better than the expected 6% increase to $11.482 billion. The Nike Direct sales rose 17% to $5.3 billion.

While the revenue growth is a positive sign for the company, the gross margins fell by 330 basis points to 43.3%, which is weaker than some forecasts. The company attributed the decline to higher markdowns to liquidate inventory and other factors. Despite the liquidations, inventories rose by 16% compared to a year ago to $8.9 billion, due to higher input and freight costs, the company said.

Nike President and CEO John Donahoe, however, said on an earnings call that the company is "making great progress on inventory, with our inventory dollars down sequentially vs. last quarter."

What Happened in China?

Nike Direct sales, which include online and its own stores, jumped by 17% to $5.3 billion. The company's gross margins fell by 330 basis points to 43.3%, weaker than some forecasts, due to higher markdowns to liquidate inventory and other factors. Despite this, inventories rose by 16% to $8.9 billion year-over-year, due to higher input and freight costs, but CEO John Donahoe said the company was "making great progress on inventory, with our inventory dollars down sequentially vs. last quarter" on an earnings call.

Cash and equivalents fell by 20% to $10.8 billion, and the company warned of continuing margin pressure as it continues to reduce excess inventory with heavy discounting. However, it is on track to exit fiscal 2023 with "healthy" inventory levels, according to Donahoe.

In China, Q3 revenue fell 8% to $1.99 billion, despite an end to Beijing's harsh zero-Covid policy. Outside China, revenue grew double digits across North America; Europe, Middle East and Africa; and Asia Pacific and Latin America. Management said product innovation is driving strong consumer demand, but the company is "closely monitoring the building pressure on consumer confidence and the uncertainties of the macro environment."