Nike is on its ‘second-quarter of constant currency growth’ amid China sales boost: Analyst

Nike stock rises after exceeding third quarter expectations from Wall Street.

Video Transcript

SEANA SMITH: Some breaking news here. Nike shares up about 3 and 1/2% on the heels of its earnings results. Josh Schafer has the numbers for us. Josh, what do you got?

JOSH SCHAFER: Yeah, Seana, so we've got a beat on the top and bottom line here for Nike. So if you take a look at the revenue coming in at $12.4 billion, that was over an estimate of $11 and 1/2 billion. And then adjusted EPS coming in at $0.79, that beat Wall Street estimates of about $0.55. Now big story here for Nike has been inventories. Inventories coming in, up 16% year over year. That beat the Wall Street estimate of 18.5%. It is now the second straight quarter that Nike has seen declining overall inventories.

Nike CFO noting in the release, we have made, quote, "tremendous progress in terms of inventories." Now gross margin coming in at 43%. That was right about in line with what the Street was expecting. That's the fourth straight quarter, though, of gross margin declines for Nike. Couple other key numbers, North American revenue coming in up 27%. That beat Wall Street estimates. Greater China down 8% year over year, a little bit wider of a decrease there than what the Street had been expecting, guys.

SEANA SMITH: Yeah, certainly, we're seeing the reaction here after hours with the stock up just over 3%. We want to talk a little bit more about this, dig into these results. For that, we want to bring in Adrienne Yih, Barclays consumer discretionary analyst. Adrienne, it's good to see you here. So it looks like the Street's satisfied with this report. What's your initial take?

ADRIENNE YIH: This is a good report. It's an extremely good report. I think they hit on all of the areas where people were somewhat concerned about. Certainly, the inventory was probably singularly-- we've been talking about inventory probably for the past three quarters, if not longer. But the excess inventory, at least for the past three quarters, really getting that in check and having the sales be up. So I think you've heard me, probably the last time I was on, I said, the best way to get rid of inventory is to beat your sales number. And that extra $900 million on the top line will certainly help.

DAVE BRIGGS: And their CEO speaking of a digital advantage that fuels brand momentum. How are we seeing that in the report, Adrienne?

ADRIENNE YIH: Yeah, so they're a DTC business, right? So they have two components of the business. They have wholesale, which was also up strongly. It was up 12%. So that piece of the business was up. But remember last quarter, wholesale was up more than DTC, and everybody was like, oh, well, the DTC strategy must not be working. Well, this data point proves that not only can they drive the wholesale piece of the business, but the brand key itself and all the new high key products that they are putting forth into the marketplace at retail, in their own channels and their partner channels, is actually working.

We had Foot Locker yesterday report, right? And Foot Locker even talked about the notion that they are not seeing the departure of Nike as quickly because there's so much demand in the retail market for their product.

SEANA SMITH: Adrienne, real quick, there were some questions going into this report just about the fact that Nike did lose its chief digital officer earlier next year, that maybe that would signal some sort of strategy shift here going forward. Do you see that at all as maybe a risk here? Maybe this number that we're seeing today won't be as strong in the coming quarters.

ADRIENNE YIH: I don't, actually. And the reason I say that is because these strategies were laid out a couple of years ago in their long range plan, in their four or five-year long range plan. So these changes and these directional kind of shifts, they do not come lightly. The company had talked about shifting sort of from pre-pandemic to post-pandemic over that kind of three-year horizon to get from 40% of-- to shift another 20% sort of into the digital channel.

And what we're seeing is that their DTC, total DTC business today, sits at just under-- just over 40%, about 42% as of the last quarter, but only half of that, roughly half of that is digital. And they want 40% of the business to be digital. So there's no change in strategy. I think the leadership changes. That happens over time. But these strategies are well laid out over a multiyear horizon.

JOSH SCHAFER: Adrienne, greater China revenue down 8% again on a year over year basis. Just curious what you make of that potential headwind. Do you see that going away, moving forward? How are you evaluating that right now?

ADRIENNE YIH: If there was one part of the press release and sort of one data point that did not live up to expectations, right, clearly, the North American market beat by 500 million. So all the other areas, APLA, EMEA, they all kind of constituted the remainder of the beat. But you're absolutely correct. We actually could call the greater China a slight miss relative to consensus expectations, where I think they were sitting at, like, 2.1 billion, 2.05 billion.

What I would say is constant currency, it was up. It is a very volatile market there. We know that they are aggressively marketing in the China market. They're also kind of being very price sensitive, but then so are all the other Western competitors as we try to come out of this. So I would say that we're on the second quarter of constant currency growth. Last quarter was 5%. This quarter is 1%. We wanted to see more from them.

But the fact of the matter is everything you hear from global luxury and all these other players that are opening in China, they're all talking about a bumpy road, but the direction of travel is up and reopening. And remember, a lot of greater China says not only do they happen within China, but once you see these Chinese consumers start to travel, you're going to see a significant portion, double digit portion of Chinese consumer sales that happen outside of mainland China.

DAVE BRIGGS: One thing you won't see in this report, but I want to get your thoughts on the opening created by the breakup between Kanye West and Adidas. How significant is that opportunity for Nike?

ADRIENNE YIH: I think it's a huge opportunity. So if I may make a comment that the knock on Adidas had been that they relied too heavily on the Yeezy innovation and that they themselves have admitted this, that they were not keen on a multiyear. And we're talking, like, two, three, four years in the pipeline of innovation. That's the product development R&D that Nike does. They have a four, five-year horizon of filling the pipeline with short-term product, medium-term product, and long-term product.

And I think what you're seeing here is that that long-term investment has not been made by their single biggest competitor. And Nike has been making it. So there's a lot of open market share that is sort of up for grabs, particularly in the China market when they reopen, and I think this print from Nike is testament to the fact that they have invested throughout the pandemic, and it's going to pay off.

SEANA SMITH: Adrienne, going into this report, you had a neutral rating, enough to make you more bullish on this name?

ADRIENNE YIH: Going into the first week, we kind of previewed a lot of what's happening here on the upside. And I have to say, there's some regrets about not kind of stepping up to the plate in front of this print. We knew that there was some good momentum, and our data points had definitely suggested that. We had no idea there was almost a billion dollars of upside in the top line. So, yes, this is a incrementally positive data point for sure.

JOSH SCHAFER: And with the print, we obviously saw Nike hold up through the holiday period. Curious when we think about the broader consumer demand in the retail space, is that still a big concern for Nike, or do you think that Nike is maybe a net winner there when some other retail players might not be?

ADRIENNE YIH: That's a great question. What we are seeing starting at the beginning of March is complete kind of anemic behavior from the consumer. I mean, in apparel and other product categories, you are seeing high promotions with clean inventory and negative sales. So there's real inability to convert. And this consumer really is very tight with their money, and they do not want to be coming out and buying more product, right?

They have shifted to services, but for two categories, the first category being athletic footwear, the second quarter-- category being beauty. Those two categories are highly, highly resilient, I think partly because they are all about health and wellness and investing in yourself. And so those two categories continue to maintain momentum, notwithstanding an overall kind of fall in the consumer space.

DAVE BRIGGS: Adrienne Yih, that was outstanding. Thank you so much. Very much appreciate that--

ADRIENNE YIH: Thank you.

DAVE BRIGGS: --analysis. Really good. All right.