Nike (NKE.US) reported great financial results for its fiscal second quarter, ending November 30, 2022 with revenue and earnings per share beating analysts forecasts on Wall Street.

Right after the results, the stock price increased by more than 12% on the background of the prospects regarding the improvement of inventories accumulated until now.

Financial highlights

• Revenues: $13.3 billion, up 17% y/y
• Earnings per share: $0.85, up 2% y/y
• Gross margin: 42.9%, down 3% y/y
• Net profit: $1.3 billion, flat y/y
• Inventories: $9.3 billion, up 43% y/y
• Operating expenses rose 10%, to $3.0 billion
• Selling and administrative expenses rose 10%, to $4.1 billion
• Marketing costs rose 8%, to $1.1 billion
• Nike brand revenue: $12.7 billion (up 18% y/y)

Revenues from subsidiary brand, Converse: $586 million (up 5% y/y) and NIKE Direct sales totaled $5.4 billion, up 16% y/y, NIKE Brand Digital sales up 25% y/y

The company commented on the lower gross margin as a reason, pointing to price reductions that were implemented to liquidate inventory, particularly in North American markets.

Other reasons include the unfavorable impact of foreign exchange rates, higher freight and logistics costs and increased product input costs.

The company cited rising payroll costs and strategic technology investments as reasons for 10% higher operating expenses. Nike’s cash and cash equivalents and short-term investments totaled $10.6 billion, down roughly $4.5 billion y/y, as free cash flow was offset by share buybacks and dividends.

„NIKE’s performance this quarter is a testament to our deep connection with consumers … our growth was broad-based and driven by expanding digital leadership and brand strength. These results give us confidence that we will continue the competitive advantage that will fuel our momentum this year.” – commented on the results John Donahoe, president and CEO of Nike.

Nike has consistently paid dividends to shareholders for the past 21 years through what, in light of above-expectations financial results, could become a stock seen as attractive in an environment of economic slowdown and lower returns offered by technology stocks.

In the second quarter, Nike returned nearly $2.1 billion to shareholders, of which $480 million was allocated to dividends (up 10% year-on-year). Share repurchases totaled $1.6 billion, bringing the total to 16.5 million repurchased shares under the four-year, $18 billion program approved by the Board of Directors in June of this year.

As of November 30, 2022, Nike had already repurchased a total of 19 million treasury shares under the program.

Analyst opinions

According to Jefferies, Nike’s brand remains strong, margins are intact and global demand is healthy. Analysts said they expect inventory problems to go away in the future, as well as stronger demand in China, which will improve margins by which they raised their recommendation for Nike.

BMO Capital Markets analysts also commented positively on the results, noting better future prospects in China and outperformance of other retailers.

Conclusions

Better-than-expected sales and profits meant that investors’ concerns about a slowdown hitting the manufacturer fell slightly, favoring a rebound after the intense sell-offs the company experienced in 2022.

The company has sharply reduced inventories, which had caused analysts to worry about margins, but these are still performing at very decent levels. Compared to the previous fiscal quarter, inventories fell by double digits with management indicating that it will continue to focus on liquidating them mainly at retail stores, which gives hope for further progress in calendar 2023.

Management expects the company’s inventory peak to be behind it, but the forecast is still dependent on global conjuncture. Despite the declines, the stock is still trading up 43% y/y, with sales in China down 10%.