As Wall Street whispers hinted at a slowdown, Nike dashes the naysayers with stronger than expected earnings and a robust performance in China.
After the market closed on Thursday, Nike unveiled its fiscal first quarter financial results that not only beat analysts’ expectations regarding gross margins and earnings per share but also displayed an unanticipated resilience in the wholesale segment of the business.
In response, the sportswear giant saw its stock soar by more than 9%. This upward trajectory continued during the earnings call as company executives emphasized the strength of the consumer base and alleviated concerns over a potential decline in the Greater China market.
Highlighting the unwavering demand for the brand’s offerings, Nike CFO Matthew Friend remarked during the earnings call, “We continue to see consumer demand for our brands and for our products to be very, very strong. The consumer is proving to be resilient.”
Breaking Down the Numbers
A side-by-side comparison with Bloomberg’s consensus estimates gives insight into Nike’s financial muscle during this quarter:
- Revenue: Nike recorded a revenue of $12.94 billion, which, although slightly below the estimated $12.99 billion, showcased a marked increase from the $12.69 billion recorded in the same period last year.
- Adjusted EPS: The adjusted earnings per share stood at $0.94, surpassing the projected $0.75 and marginally above the $0.93 from the corresponding quarter of the previous year.
- Gross Margin: The reported gross margin of 44.2% also outstripped estimates of 43.7%, though it was just a touch below last year’s 44.3%.
Significantly, Nike’s inventories witnessed a drop to $8.7 billion – a 10% decrease compared to the previous year. This is notably lower than the $8.84 billion analysts had predicted, showcasing the brand’s successful efforts in streamlining operations following the inventory issues that overshadowed 2022. Additionally, the direct-to-consumer sales metric, an important indicator for the brand’s growth, escalated to $5.4 billion, marking a 6% rise year-over-year.
The China Equation
The revenue from Greater China for the quarter stood at $1.74 billion. Though this figure falls short of the $1.83 billion expected by analysts, it’s essential to note the various challenges the brand faces in the region.
Sucharita Kodali from Forrester Research, while discussing Nike’s performance, pointed out on Yahoo Finance Live, “The China story is probably the biggest one here for Nike. The challenge is that Nike has been very dependent on the Asian market, especially the Chinese consumer.”
However, Nike executives seemed optimistic about the brand’s prospects in China. John Donahoe, Nike’s CEO, reiterated his confidence, drawing from his recent visits to the country. “Sport is back in China, you can just feel it,” he asserted. “That gives us great confidence about the future and the Chinese consumer in our segment, irrespective of the broader economic trends.”
In conclusion, despite the turbulence of global markets, Nike’s strong Q1 performance indicates its unwavering stride in the retail sector and its capacity to manage potential challenges, especially in pivotal markets like China.
Is Nike Stock Halal? A Shariah-Compliance Review
Nike, Inc., the world’s leading designer and marketer of sports footwear and equipment with a market capitalization of about a quarter of a trillion dollars, is under the lens for its Shariah-compliance status. The evaluation is based on three main criteria:
- Business activity
- Interest-bearing debt in relation to the company’s market capitalization
- Interest-bearing securities in relation to the company’s market capitalization.
Overview of Nike’s Business
Established in 1964 as “Blue Ribbon Sports” and renamed Nike, Inc. in 1971, the company operates across regions such as Europe, Asia Pacific & Latin America, North America, Middle East & Africa, and Greater China. With its headquarters in Beaverton, Oregon, Nike employs over 73,300 full-time personnel and offers a range of products from eyewear to protective equipment under its brand.
- Business Activity: Only 2.41% of Nike’s revenue comes from non-Sharia-compliant activities. A total of 97.59% of its revenue is derived from Shariah-compliant business activities. Nike clears the first screening since the impermissible activities do not surpass 5% of the total revenue.
- Interest-bearing Debt: The interest-bearing debt of the company is 5.35% of its market capitalization, well below the 30% limit, making it compliant with the second criterion.
- Interest-bearing Securities: Accounting for 4.48% of its market capitalization, Nike’s interest-bearing securities also stay within the 30% threshold, clearing the third and final screening.
Nike meets all the set criteria for Shariah-compliance. Consequently, Muslim investors seeking Shariah-compliant stocks can confidently consider investing in Nike.
Why Nike Deserves a Spot in Your Portfolio
Despite recent earnings warnings from sports retailers Dick’s Sporting Goods and Foot Locker negatively impacting the sentiment around Nike, there are compelling reasons why investors should consider Nike shares.
- Inventory Normalization and Pricing: Nike had previously faced margin pressures due to inventory pile-ups, which led to increased sales promotions and reduced profits. Now, the company is normalizing its inventory, aiming to return to full product pricing. This move will help reduce excessive promotions and restore its gross margins. For 2024, Nike is planning slight price hikes to further boost margins.
- Rapid Recovery in China: With the easing of the zero-COVID policy restrictions in China, Nike has witnessed a significant 16% YoY revenue increase in fiscal Q4 2023 to $1.81 billion. This growth rate surpasses other regions, and the upward trend in China is expected to persist.
- Attractive Valuation with Upside Potential: Currently, Nike’s shares have dipped by 16.7% YTD, presenting a contrast to the S&P 500’s 15.5% rise. This drop and a 1.48% annual dividend yield suggest significant upside potential. Historically, stocks that underperform often bounce back at the start of a new year after tax loss selling. Moreover, Nike has affirmed strong consumer demand across its platforms.
- Emphasis on Direct-to-Consumer (DTC) Channel: Nike increasingly focuses on its DTC channel, allowing it to achieve higher margins by eliminating middlemen. Its DTC efforts are evident from the flourishing Nike.com website and the growth of its brick-and-mortar stores offering discounted merchandise. Nike’s loyalty app also encourages direct purchases by offering members exclusive perks. This strategy is evident in its Q4 2023 earnings, where Nike Direct saw a 15% YoY revenue increase to $5.5 billion.
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