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NIKE (NKE) Q1 Earnings Beat on Strong Retail Sales, Stock Gains

NIKE Inc. NKE reported first-quarter fiscal 2024 results, wherein earnings beat the Zacks Consensus Estimate. Moreover, the top and bottom lines improved year over year. Results particularly gained from robust retail sales across Nike Direct and wholesale businesses. NKE also continued to benefit from its business strategy, compelling product innovation and digital leadership. However, high operating costs and expenses affected its margin.

In first-quarter fiscal 2024, the company’s earnings per share were 94 cents, up 1% from the 93 cents reported in the year-ago quarter. Earnings also beat the Zacks Consensus Estimate of 74 cents.

Revenues of the Swoosh brand owner grew 2% year over year to $12,939 million but missed the Zacks Consensus Estimate of $12,950 million. On a currency-neutral basis, revenues were up 2% year over year, driven by broad-based across all brands, channels and geographies.

NIKE, Inc. Price, Consensus and EPS Surprise

 

NIKE, Inc. Price, Consensus and EPS Surprise
NIKE, Inc. Price, Consensus and EPS Surprise

NIKE, Inc. price-consensus-eps-surprise-chart | NIKE, Inc. Quote

Sales at NIKE Direct improved 6% on both reported and currency-neutral basis to $5.4 billion, backed by growth across all geographies. The increase included 2% growth at NIKE Digital, on both reported and currency-neutral basis, and a 12% rise at NIKE stores. The rise in NIKE Direct revenues was driven by improved traffic at stores and online.

Wholesale revenues of $7 billion were flat with last year on a reported basis and improved 1% on a currency-neutral basis. The results benefited from the company’s proactive efforts to confine inventory supply and prioritize marketplace health, particularly in North America.

Shares of NIKE rallied 7.8% in the after-hours trading session on Sep 28, 2023, following the strong results. Overall, shares of the Zacks Rank #3 (Hold) company have lost 15.6% in the past three months compared with the industry’s decline of 18.3%.

 

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

 

Operating Segments

The NIKE Brand revenues were $12,353 million, up 3% year over year on both reported and currency-neutral basis. Results were driven by currency-neutral growth in EMEA, Greater China and APLA, partially negated by a decline in North America.

We estimated total NIKE Brand revenues to increase 1.9% year over year to $12,272.7 million in the fiscal first quarter, driven by 1.6% growth in Direct-to-Consumer and a 2% rise in the Wholesale business.

Within the NIKE brand, revenues in North America fell 2% on a reported basis and 1% on a currency-neutral basis to $5,423 million. The decline can be mainly attributed to an 8% decline in the wholesale business. Sales for the NIKE Direct business were up 7% in the region, including a 4% increase at Nike Digital and 11% growth at Nike Stores. Digital and store sales benefited from robust retail sales momentum throughout the quarter, and strong back-to-school sales.

In EMEA, the company’s revenues rose 8% on a reported basis and 6% on a currency-neutral basis to $3,610 million. NIKE Direct revenues for the segment grew 6% on a currency-neutral basis, with 17% growth in Nike Stores, offset by a 2% decline at Nike Digital. Double-digit growth in global football and fitness, as well as solid sales for the Women’s category, aided the results.

In Greater China, revenues advanced 5% year over year on a reported basis and 12% on a currency-neutral basis in the fiscal first quarter to $1,735 million. The region has been witnessing a rebound in brick-and-mortar traffic with strong retail momentum during the back-to-school season. NIKE Direct rose 10% on a currency-neutral basis, while NIKE Digital revenues were up 6% year over year and Nike Stores up 12%. Moreover, Wholesale revenues grew in the double-digits, driven by another quarter of strong sell-through.

In APLA, NIKE revenues rose 2% on a reported basis and 3% on a currency-neutral basis to $1,572 million. NIKE Direct advanced 3% on a currency-neutral basis, driven by a 10% surge in NIKE Stores, offset by a 3% decline in Nike Digital. Japan, Southeast Asia & India, and Mexico led sales growth in the region during the fiscal first quarter.

Revenues at the Converse brand dropped 9% on both reported and currency-neutral basis to $588 million. The decline was led by softness in North America, somewhat offset by growth in Asia.

Costs & Margins

The gross profit rose 2% year over year to $5,720 million, while the gross margin contracted by 10 basis points (bps) to 44.2%. The decline in the gross margin can be attributed to elevated product costs and unfavorable currency rates. This was partly negated by the company’s pricing actions.

Selling and administrative expenses increased 5% to $4,116 million, driven by elevated demand creation expenses and a moderate increase in operating overhead costs. As a percentage of sales, SG&A expenses expanded 90 bps from the prior-year quarter to 31.8%.

Demand-creation expenses increased 13% year over year to $1,069 million, owing to elevated sports marketing and advertising investments. Operating overhead expenses were up 2% to $3,047 million on higher wage-related expenses and NIKE Direct variable costs, offset by lower spending on technology.

We anticipated the gross margin to decline 50 bps to 43.8%. Our model predicted SG&A expenses of $4,360.5 million, which indicated year-over-year growth of 11.2%.

Balance Sheet & Shareholder-Friendly Moves

The company ended the quarter with cash and cash equivalents of $6,178 million, down 15% year over year. Short-term investments were $2,612 million, down 44% year over year. It had a long-term debt (excluding current maturities) of $8,929 million and shareholders’ equity of $13,971 million as of Aug 31, 2023.

As of Aug 31, 2023, inventories of $8,698 million declined 10% from the prior-year levels.

In first-quarter fiscal 2024, the company returned $1.7 billion to shareholders, including $1.1 billion in share repurchases and $524 million in dividends. With the share repurchases, it retired 10.5 million shares in the fiscal first quarter, as part of the $18-billion share repurchase program approved by the company in June 2022.

Outlook

Backed by a solid consumer momentum, a robust product innovation pipeline and a strong inventory, management reaffirmed its solid outlook for fiscal 2024. For the fiscal year, it expects revenues to grow in the mid-single digits.

The fiscal 2024 gross margin is envisioned to expand by 140-160 bps on a reported basis. This reflects 50 bps of foreign exchange headwinds. SG&A expenses are predicted to slightly outpace revenue growth, indicating a growth rate at the high-end of the mid-single digits.

The company anticipates other income and expenses, including net interest income, of $225-$275 million for fiscal 2024. The effective tax rate is forecast to be in the high teens.

For the fiscal second quarter, NIKE anticipates revenue growth to be up slightly from the prior year, owing to difficult comparisons from last year’s solid growth. The gross margin for the fiscal second quarter is likely to expand 100 bps, driven by gains in strategic pricing, improved markdowns and lower ocean freight rates. This is expected to be partly offset by higher product input costs and 50 bps of negative impacts of adverse currency rates.

SG&A expenses are expected to increase in the mid to high-single digits, owing to increased demand creation investments. The company estimates the tax rate for the fiscal second quarter to be in the high teens.

Stocks to Consider

We have highlighted three better-ranked stocks from the Consumer Discretionary sector, namely GIII Apparel Group GIII, Guess GES and Skechers SKX.

GIII Apparel currently sports a Zacks Rank #1 (Strong Buy). Shares of GIII have rallied 29.2% in the past three months. You can see the complete list of today's Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for GIII Apparel’s current financial year’s sales and earnings per share suggests growth of 8% and 14.7%, respectively, from the year-ago period’s reported figures. GIII has a trailing four-quarter earnings surprise of 526.6%, on average.

Guess has a trailing four-quarter earnings surprise of 43.4%, on average. It flaunts a Zacks Rank #1 at present. Shares of GES have risen 9.5% in the past three months.

The Zacks Consensus Estimate for Guess’ current financial-year sales and earnings suggests growth of 3.7% and 9.9%, respectively, from the year-ago period's reported figures.

Skechers has a trailing four-quarter earnings surprise of 39.1%, on average. It currently sports a Zacks Rank #2 (Buy). Shares of SKX have declined 9.2% in the past three months.

The Zacks Consensus Estimate for Skechers’ current financial-year sales and earnings suggests growth of 8.7% and 42.4%, respectively, from the year-ago period's reported figures.

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Skechers U.S.A., Inc. (SKX) : Free Stock Analysis Report

Guess?, Inc. (GES) : Free Stock Analysis Report

G-III Apparel Group, LTD. (GIII) : Free Stock Analysis Report

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