NIKE (NKE) Shoots And Scores In Q2 As Robust Demand Leads To Fewer Markdowns Than Expected
2:58 pm Wednesday, December 21st, 2022
Heading into NIKE’s (NKE) 2Q23 earnings results, there was concern that the athletic footwear and apparel giant would deliver a lump of coal into investors’ stockings as it grapples with a glut of inventory in a highly promotional environment. Instead, NKE gift-wrapped an impressive beat-and-raise report as it experienced strong demand across its brands, channels, and markets.
Thanks to that robust demand, markdown activity wasn’t as severe as originally feared, enabling gross margin to exceed expectations. Last quarter, NKE warned that discounted prices would result in a 350-400 bps drop in gross margin, but the company outperformed that guidance as gross margin only fell by 300 bps to 42.9%.
There is still a good amount of excess inventory to work through — inventory was up 43% on a yr/yr basis — but the makeup of that inventory (less seasonal apparel) and NKE’s sales momentum is easing concerns on this issue.
The other main issue that has plagued the stock is the persistent weakness in China.
COVID-related lockdowns and the related macroeconomic headwinds have curtailed demand there, as reflected in the 13% drop in revenue for Greater China in Q1, which was preceded by a 20% plunge in Q4.
In this quarter, though, sales picked up significantly with revenue in China down by just 3%. On a constant currency basis, sales were actually higher by 6% with NKE crediting local marketing, its investments in technology, and a shift towards the digital channel as key differentiators in Q2.
In North America, the news is even more upbeat with revenue up by 30% as both the wholesale and direct channels excelled.
Market share gains across its top partners, including at Dicks Sporting Goods (DKS) and Foot Locker (FL), fueled a 19% increase in wholesale revenue.
The main takeaway is that the two primary concerns that have afflicted the stock — bloated inventory levels and softness in China — turned out to be key positives for NKE in Q2. While the company isn’t out of the woods just yet on either point, the arrow is clearly pointing in the right direction on both items. Simply put, NKE demonstrated once again why it’s regarded as the premier name in the athletic footwear and apparel space.
