6 highlights from Nike’s FY22 Q2 earnings

Nike (NYSE: NKE) is the largest seller of athletic footwear and apparel in the world.

You may even own a pair of Nike shoes yourself!

Here are 6 highlights from Nike’s latest earnings report.

1. Revenue

The second quarter reported revenues were $11.4 billion, up 1% compared to the prior year. The company saw higher revenues in North America, EMEA and Converse. But they were offset by lower revenues in Greater China and APLA.

The lackluster revenue growth is primarily due to headwinds from the ongoing supply chain challenges. Revenues in Greater China and APLA declined, largely due to lower levels of available inventory from COVID-19 related factory closures. Due to these constraints, management has also lowered its revenue guidance for FY2022 from a midpoint of 10% growth to mid-single-digit growth.

On the bright side, Nike’s “Consumer Direct Acceleration” strategy seems to be successful in raking in more sales. The strategy aims to shift more of its sales towards selling directly to customers via its own physical and online stores. NIKE Direct sales were $4.7 billion, up 9%. NIKE Brand Digital sales increased 12%, led by 40% growth in North America.

The shift towards more direct sales has also resulted in a 2.8% increase in gross margin to 45.9%. Revenues for Converse, a subsidiary owned by Nike, which sells athletic lifestyle sneakers, apparel and accessories, were $557 million, up 16%, led by strong performance across all channels in Europe and North America.

2. More about what caused the revenue slowdown

During the first quarter of fiscal 2022, the majority of NIKE and Converse contract manufacturers in Vietnam and Indonesia were subject to government-mandated shutdowns due to COVID-19. 

These closures have significantly impacted Nike’s previously planned inventory production. As a result of these closures, Nike has lost approximately three months of production, impacting available product supply for this fiscal year.

All factories started re-opening in October and are currently operational. However, the company expects it will take several months to return to pre-closure production volumes. In addition, Nike’s product availability was also impacted by the extended inventory transit times. This is due primarily to port congestion, transportation delays as well as labour and container shortages. 

3. Net Income

As Nike saw improvement in its gross margins, it still managed to display single-digit growth to its bottom line. Its net income was $1.3 billion, up 7%. And its diluted earnings per share (EPS) was $0.83, increasing 6%.

While this falls short of analysts’ expectations, I am still optimistic that once revenue starts to rebound after it can resolve its short term supply chain challenges. Its EPS might even increase at a faster rate due to the continued gross margin improvement. 

Moreover, its gross margin will improve not only due to the continued shift to direct sales. As its transportation, logistics and fulfillment costs normalised, we might see better margins from that recovery as well.

4. Returning Value to Shareholders

NIKE continues to have a strong track record of consistently increasing returns to its shareholders, including a 20 consecutive years of increasing dividend payouts. In the second quarter, NIKE returned approximately $1.4 billion to shareholders, including:

  • Dividends of $437 million, up 14% from the prior year.
  • Share repurchases of $968 million for the quarter, as part of the four-year, $15 billion program approved by the Board of Directors in June 2018. As of November 30, 2021, a total of 60.8 million shares have been repurchased under the program for a total of approximately $6.4 billion.

It is very rewarding to invest in a business which looks promising for the future, and yet giving investors side income in the meantime. On the other hand, share repurchases help to reduce the total number of outstanding shares, which in turn boost shareholder value as well.

More importantly, it also shows that management is returning excess cash that it does not need, back to its shareholders. This is a sign of good capital management.

5. Partnership with differentiated retailers

Apart from shifting its focus towards direct sales, the sports footwear and apparel company is also being more selective when it comes to choosing which wholesale retailers to partner with.

Just a few months back, Nike announced a partnership with one of its strategic retail partners, Dick’s Sporting Goods, which shares its vision for the future of retail, which specifically, refers to shopping and experiences that are amplified by digital and personal to each consumer’s journey. This new partnership allows shoppers to link their Nike member account and their DSG account together to unlock exclusive offers, products and experiences.

6. Delving into the Metaverse

With this being such a hot topic lately, Nike is jumping onto the bandwagon and venturing into the all-so-exciting Metaverse. Since Q2 this year, Nike launched its 3D immersive world of NIKELAND on Roblox, an online gaming platform. In Nikeland, users will be able to dress up their avatars in Nike-branded sneakers and apparel. Nikeland is free for now but could have the potential to be used as a testing ground for new products before their launch and to gauge consumers’ interests.

Nike has quietly been preparing for the metaverse by recently filing a host of new trademarks indicating its intent to make and sell virtual Nike-branded sneakers and apparel. On 13th Dec 21, NIKE announced the acquisition of RTFKT, a company that makes NFT collectables.

While this is certainly an exciting field to look at, the Metaverse is for now still a distant concept. So it is more prudent for us to not expect much from this venture.

Conclusion

Nike is one of those companies which probably leaves a deep impression in your mind, with its unforgettable “Just Do It” tagline. The company has one of the strongest brand moats and a worldwide reputation for delivering high-quality sports footwear and apparel. 

While logistics and supply chain issues have dragged down the company’s performance this quarter, there are still many good reasons to believe Nike will continue to be a good long-term investment.

Additionally, Nike is poised for future growth. Tailwinds include a larger movement of health and fitness that is taking place around the world, consumers’ desire to wear athletic footwear and apparel in all moments of their lives and an expanding definition of sport, and last, the fundamental shift in consumer behaviour toward digital is working out well for the company.

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