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Nike (NKE) Q2 Revenue 2023

Nike's gross margins will improve early next year, says BMO's Simeon Siegel

Nike on Tuesday reported quarterly results that easily topped Wall Street expectations while raising the outlook, even as higher costs squeezed the company’s margins.

Shares of Nike rose more than 13% after hours on Tuesday.

Here’s how Nike did in its fiscal second quarter compared to what Wall Street expected, based on a survey of analysts by Refinitiv:

  • Earnings per share: 85 cents vs. 64 cents expected
  • Revenue: $13.32 billion against the expected 12.57 billion dollars

The company reported net income for the three-month period ended Nov. 30 was $1.33 billion, or 85 cents per share, compared with $1.34 billion, or 83 cents per share, a year earlier.

Nike reported revenue of $13.32 billion, up 17% from $11.36 billion a year earlier.

Considering the strong performance, Nike CFO Matt Friend said on an earnings call that the company now sees revenue growing in the low-teens for the full fiscal year.

Over the past three quarters, Nike has beaten Wall Street expectations but, like other retailers, has struggled with bloated inventory levels stemming from supply chain disruptions, rising consumer demand and unpredictable shipping times during transit.

Inventories increased 43% to $9.3 billion in the quarter, compared to last year. The glut of merchandise led to aggressive markdowns, which helped reduce Nike’s gross margin to 42.9% from 45.9% a year ago. However, inventory was down from $9.7 billion in the previous quarter. Nike CEO John Donahoe said he believes the company is already past peak inventory. Gross margins are expected to decline by two percentage points to 2.5 percentage points next quarter as liquidation efforts continue, Friend said.

The company also saw a 10% year-over-year increase in selling and administrative expenses to $4.1 billion, led largely by advertising and marketing costs and investments in Nike Direct as the company continues to move away from wholesalers. The company expects these costs to increase by high single digits next quarter as well.

While the focus on Nike Direct was largely to blame for the increased administrative expenses, the investment has paid off. Nike Direct sales increased 16% in the quarter to $5.4 billion and digital sales increased 25%. In recent quarters, wholesale revenues have actually been flat, but increased by 19% in the quarter.

Nike’s sales in China, its third-largest market by revenue, fell 3% compared with last year, continuing a trend the retailer has struggled with as the country deals with prolonged Covid shutdowns and a slowdown in retail spending. Total retail sales in the country fell 5.9% in November compared with a year ago, and sales of clothing and shoes fell 15.6%, according to the National Bureau of Statistics of China.

After Nike’s fiscal first-quarter earnings were released in September, executives said the company’s inventory had grown 65% over the past year in North America alone, and as a result, the company adopted an aggressive marketing strategy to phase out the items and make space for new products.

The plan was a key part of Nike’s strategy to move direct-to-consumer sales away from wholesalers by improving the in-store experience and enticing customers to shop directly from the company online.

On Friday, Nike announced its new “Jordan World of Flight Milan” store located on Via Torino, a famous shopping district in the Italian area known for its designer shoe stores.

The initiative reflects the steps Nike is taking to grow the company as a direct-to-consumer brand.

The store, called a “first-of-its-kind retail experience” by the company in a press release, features a built-in member’s lounge and will include interactive shopping experiences tailored for fans of the renowned sneaker brand.

Read the company’s earnings report here.

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