Nike (NKE) Running Lower As Supply Chain Woes, FX Headwinds, And China Softness Weigh On Outlook
1:39 pm Tuesday, June 28th, 2022
NIKE (NKE) leaned on healthy demand across most of its markets to deliver upside 4Q22 results, dodging investors’ worst-case scenario fears that it would fall short of expectations due to supply chain issues and softness in China. However, those difficulties have not abated and are now combining with foreign exchange headwinds to weigh on NKE’s outlook. Due to the strengthening U.S. dollar, the company expects 1Q23 revenue to only be flat to slightly up from $12.25 bln last year, missing analysts’ estimates.
In the weeks prior to NKE’s earnings report, sports and fitness-related companies such as Under Armour (UAA), Dick’s Sporting Goods (DKS), and Academy Sports + Outdoors (ASO), issued mixed quarterly results and guidance. A common theme within the group was that supply chain disruptions were still problematic, painting a worrisome picture for NKE’s results. Those concerns proved to be well-founded as gross margin slipped by 80 bps to 45%, falling short of NKE’s guidance for an expansion of at least 150 bps.
There were some notable bright spots, too.
Despite lapping growth of 141% in the year-earlier period, NKE still generated revenue growth of 5% in North America. Similarly, the company lapped revenue growth of 124% in EMEA, but still posted a 25% increase in revenue this quarter.
The strength in North America and EMEA is a testament to the success of its “Consumer Direct Acceleration” strategy, which lessens its dependence and exposure to retail partners. This shift is steering more customers to NKE’s direct channels (Nike-owned stores and digital platform). In Q4, NIKE Direct reported revenue growth of 7% to $4.8 bln, on top of last year’s growth of 73%.
NKE also authorized a new four-year $18 bln stock repurchase program, supporting its optimistic view that demand will remain strong as supply chain issues eventually improve.
Until this quarter, NKE had managed to mostly navigate around the supply chain disruptions that have wreaked havoc on so many companies. The lockdowns in China proved to be a tipping point, though, offsetting the strong demand and pricing power that has helped NKE to overcome its challenges. Now, foreign exchange headwinds are adding another obstacle for NKE to hurdle. In terms of the factors that NKE can control, it continues to perform well in a very turbulent business climate.
