Nike (NKE) released the results of the firm’s fiscal fourth financial quarter on Monday night. Nike beat Wall Street on both the top and bottom lines. It doesn’t even start to tell a story. The story of a difficult quarter that could have been worse and how the company expects to continue from it. This is that story.
For the three-month period ending May 31, Nike posted GAAP EPS of $ 0.90 on revenue of $ 12.234B. These numbers are printed in a state of recession, albeit small compared to EPS of $ 0.93 to revenue of $ 12.344B for a year ago. NKE Direct is perhaps the highlight, with sales of $ 4.8B, up 7% or 11% on a neutral monetary basis.
Wholesale revenues of $ 6.8B were down 7% or 3% on a neutral monetary basis. Gross margin contracted 80 basis points at an equal 45% as operating overhead costs rose 8% to $ 3B due to higher investment in strategic technology and an increase in NKE Direct variable costs and wage -related costs.
Regional Sales Performance
North America … Sales dropped 5% to $ 5.115B. Footwear decreased by 5%, apparel decreased by 5% and increased by 12%.
Europe, Middle East and Africa … Sales rose 9% to $ 3.251B. Footwear increased 11%, apparel increased 6%and equipment increased 10%.
Greater China … Sales dropped 19% to $ 1.561B. Footwear dropped by 10%, apparel dropped by 39% and equipment dropped by 27%.
Asia, Pacific, and Latin America … Sales rose 15% to $ 1.682B. Footwear increased 19%, apparel increased 8%and equipment increased 2%.
Product Sales Performance
Shoes … Sales rose slightly to $ 7.985B.
Garments … Sales dropped 6% to $ 3.237B
Equipment … Sales rose 5% to $ 387M.
Brand Selling Performance
Nike … Sales dropped 1% to $ 11,657B
Converse … Decreased 1% to $ 593M.
Balance sheet
Nike ended the quarter with a net cash position of $ 12.997B, down 3.5% from a year ago as free cash flow was offset by returns to shareholders. That said, current assets rose 7% to $ 28.213B on the back of inventories that grew 23% to $ 8.42B. Inventory growth was driven by high in-transit product due to extended lead-lag times from ongoing supply chain disruptions.
Current liabilities rose 11% to $ 10.73B, mainly with an 18% pop in account payable. This makes sense because of inventory printing. That leaves NKE with a current ratio of 2.62, which is very good. Even without inventories, NKE runs with a fast ratio of 1.84, which is still great.
Total assets of $ 40.321B rose 7%. This number includes $ 570M in “goodwill” and other undisclosed identities. That number is certainly not abusive. Total less equity liabilities amounted to $ 25.04B, including $ 8.92B in long-term debt, down 5% and $ 2.777B in lease liabilities. It also dropped 5%.
Not only is this balanced sheet in very good shape, the leadership has demonstrated excellent management skills in a difficult time. I was quite impressed. Unfortunately, bloated inventories will weigh on the margin going forward.
Shareholder Returns
Last quarter, Nike paid $ 481M in dividends, up 11% from the previous year, while repurchasing $ 1.1B worth of common stock accounting for 8.5M shares as part of a four -year $ 15B repurchase program approved by the company’s Board in June of 2018. The Board has now approved a new four -year $ 18B repurchase program to replace the old one.
Outlook
Nike sees FY 2023 (current quarter is Q1) with earnings growing to low double digits on a neutral currency basis, partially offset by foreign exchange headwinds of approximately 400 bps. For the current quarter, the company expects real earnings growth in dollars to be slightly higher compared to a year ago comp due to Covid’s continued disruption in China and more than 500 bps currency -related headwind. .
Gross margin pressure is expected to exceed 100 bps for the current quarter as the firm calibrates supply and demand in Greater China. The company also expects increased promotional activity to sell seasonal inventory that arrived late due to delays.
Wall Street
I can find nine sell side analysts rated four or five stars by TipRanks who have also been opinionated on NKE since these earnings were released last night. After considering the changes, there are eight “buy” or buy equivalent ratings and one “hold” rating. The average target price across the nine is $ 135.11 with a high of $ 155 (twice: Robert Drbul of Guggenheim and Randal Konik of Jefferies) and a low of $ 116 (Paul Lejuez of Citigroup we “hold”). Removing one of the $ 155 and the $ 116, the average target price of the other seven analysts is $ 135.00. Almost no change.
My thoughts
I think Nike has a solid quarter in everything considered. I think maybe the company is very conservative in their expectations, careful and deliberate. Balance is a work of art, and at one point important. We all know that CEO John Donahoe who ran ServiceNow (NOW) previously, was a pro. I think the 38% drop in the share price since November last year was justified due to circumstances. The stock is still trading at 23 times forward looking earnings, which is not cheap, but not insane, especially if the forward is designed to beat. I am inclined to start NKE in weakness.
Some will see a downward sloping Pitchfork with no hope of breaking that has been tested above and below trendlines. They can’t go wrong … but look again, below.
Others may see a progressive double bottom reversal with the $ 123 pivot still being made. Nor will those people make mistakes. I am one of those people.
I have an idea (minimal lots)
Buy 100 shares in NKE at or near the pre-opening final sale of $ 108.
Sell an NKE October $ 130 call for a rough $ 3.
Sell an NKE July 22nd $ 100 put for a rough $ 2.50.
Net basis: $ 102.50.
Best case? The trader called in October at $ 130 for a 26.8%profit.
Worst Case? The 100 share is put to the dealer at $ 100 in late July. Traders will have a long 200 shares on a net basis of $ 101.25 with NKE trading below $ 100.
Note: I’m flat now. I will wait for this note to be published before taking any action for myself.
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