Nike soars to 6-mth highs after optimistic earnings results

Nike Inc. shares were headed for their most significant jump in more than a year after the retailer’s quarterly sales surpassed Wall Street’s expectations.

The global revenue for the quarter ending November 30 increased 17% to $13.3 billion, almost $700 million higher than experts had predicted. The gross margin, a crucial indicator of profitability, was also above forecasts, and management reported a great year-end result.

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“Our holiday season momentum has continued through the first few weeks of December, despite operating in a largely promotional marketplace,” Chief Financial Officer Matt Friend said during a conference call.

The Nike stock price rocketed 13% higher during the US session, rising to the highest since June 2022.

Except for China, sales exceeded estimates in every location. Nike reported an increase in demand for their products in that region, despite substantial disruptions caused by Covid lockdowns. As the country eases its zero-Covid policy, executives actively monitor the situation.

Nike anticipates a currency-neutral revenue increase in the low teens for the fiscal year, which concludes in the middle of 2023. The firm forecasts that the gross margin will decline by 200 to 250 basis points.

Falling inventories, finally

The actual highlight of Nike’s fiscal second quarter, however, was the company’s reduction of its excess inventory, which was prompted by the economic downturn earlier this year. Analysts have argued that profit margins and the stock price have been negatively impacted by Nike’s aggressive liquidation of products.

Nike’s inventory decreased 3% sequentially, driven by a decline in units in the single-digit percentage range. Total inventory units have dropped by a double-digit percentage compared to the first quarter of the fiscal year.

According to Wedbush analysts, Nike’s inventory position is improving, as clothing clearance units have decreased over the previous 90 days. In addition, significant progress has been made in North America, which is “crucial” because “the domestic business has the worst inventory surplus,” as Tom Nikic noted in a note.

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At an earnings conference, management informed investors that it continues to prioritize inventory clearance, notably through off-price retail outlets. In 2023, more growth is anticipated, including a more prudent approach to purchasing new inventory.

“We believe the inventory peak is behind us; actions, as we’re taking in the marketplace, are working,” Nike CEO John Donahoe said.

Assuming the global economy does not fall off a cliff, inventory improvement positions Nike for greater profit margins in the upcoming quarters.

Technically speaking, as long as the stock price remains above the 200-day moving average (the blue line near $110), the immediate outlook seems bullish, targeting June’s highs near $125.