Nike not immune to market conditions despite beating consensus

(Alliance News) - For AJ Bell's Russ Mould, Nike Inc's latest trading update was reflective of fluctuating economic conditions, as better than expected earnings in the third quarter were underlined by disappointing sales growth in China.

For the three months to February 28, the sports apparel maker reported revenue of USD12.39 billion, rising 14% from USD10.87 billion a year prior, and beating CNN-cited consensus of USD11.5 billion.

Net income, meanwhile, fell 11% to USD1.24 billion from USD1.40 billion. Basic earnings per share declined to USD0.80 from USD0.88. Diluted EPS fell to USD0.79 from USD0.87.

Mould said that these earnings were "better than expected", but warned that inventories still look high, which means that Nike has to slash prices to clear stockpiles.

He also noted disappointing growth in China, where hopes of strong consumer spending on the relaxation of Covid-19 containment measures failed to come to fruition.

"Revenue for Greater China grew 1% on a currency-neutral basis despite a challenging December following the shift in the country's Covid-19 policies", Nike said on Tuesday. Nevertheless, Greater China revenue declined 8% on a reported basis.

Mould reflected: "One could give Nike a break given this is only a short trading period, yet if China sales don't pick up dramatically in its fourth quarter the market will not be happy."

Nike's gross margin decreased 330 basis points over the period to 43%. It attributed this to "higher markdowns to liquidate inventory; continued unfavourable changes in net foreign currency exchange rates; higher product input costs and elevated freight and logistics costs; partially offset by strategic pricing actions".

Yet, as Mould pointed out, Nike's products "certainly haven't gone out of fashion". The brand, he argued, "is simply a victim of its own success", in that its stellar performance over the years has led people to expect knock out sales every quarter - which is difficult to achieve.

Peel Hunt analysts were a little more optimistic in their expectations for Nike's fourth quarter. While they noted some gross margin impacts of excess stock, they emphasised that "the wider inventory position is improving" into the fourth quarter.

By Holly Beveridge, Alliance News reporter

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