Image Shown: Shares of Nike Inc shifted higher in the wake of its latest earnings report.
By Callum Turcan
On December 20, Nike Inc (NKE) reported second quarter earnings for fiscal 2022 (period ended November 30, 2021) that beat both consensus top- and bottom-line estimates. The company did its best to navigate serious supply chain hurdles as efforts by public health officials and governments to contain the spread of the coronavirus (‘COVID-19’) pandemic in Southeast Asia (a major production hub for apparel and footwear) weighed quite negatively on its ability to meet demand.
Earnings Update
Nike’s GAAP revenues grew 1% year-over-year in the fiscal second quarter, hitting $11.4 billion, as the company, and the apparel and footwear industry at large, contended with a massive slowdown in production of apparel and footwear in Southeast Asia. Factories in Vietnam and elsewhere shut down starting in the summer of 2021 to prevent the spread of COVID-19, a shutdown that lasted several months.
According to Nike’s latest annual report: “For fiscal 2021, contract factories in Vietnam, Indonesia and China manufactured approximately 51%, 24% and 21% of total NIKE Brand footwear, respectively.” In the short term, there was not much Nike could do to replace lost production capacity in Vietnam (which accounts for over half of its production capacity of Nike-branded footwear). According to Reuters, it took until November 2021 for production activities in Vietnam to ramp back up to more normalized levels. Looking ahead, it will take a while for Nike to rebuild its inventory of key goods back up while meeting what will likely turn out to be robust demand for its apparel, footwear, and equipment this holiday shopping season.
With these headwinds in mind, Nike’s sales continued to hold up quite well last fiscal quarter. The firm has been pivoting away from wholesale distribution channels towards a more direct-to-consumer (‘D2C’) approach, made possible through its website and mobile app offerings. Sales through NIKE Direct (its core D2C operation) advanced 9% year-over-year last fiscal quarter, and Nike noted its margins on this front improved during this period. In the fiscal second quarter, Nike’s sales in North America jumped 12% and its sales in Europe, the Middle East, and Africa were up 6% year-over-year, though its sales in the Greater China region fell by 20% and its sales in the Asia Pacific and Latin America were down 8% year-over-year.
Management cited supply chain hurdles and a general lack of inventory as holding down Nike’s performance in the Greater China region and in the Asia Pacific and Latin America region. On the flip side, Nike was impressed with the double-digit growth in its North America Direct sales seen last fiscal quarter, aided by record performance during the Black Friday holiday shopping event. Sales through its Nike Digital channels increased 12% last fiscal quarter on a year-over-year basis, with sales up 40% in North America, with management noting during the firm’s latest earnings call that sales through its Nike Digital channels now represent roughly one quarter of its Nike-branded revenues.
Image: Nike’s assortment of soccer cleats at Dick’s Sporting Goods. Image Source: Valuentum
Strength at Nike Direct combined with “lower markdowns, a higher mix of full-price sales and changes in foreign currency exchange rates, partially offset by lower full-price product margins largely due to increased freight and logistics costs” helped Nike grow its GAAP gross margins by ~280 basis points year-over-year last fiscal quarter to 45.9%. However, the firm’s SG&A expenses marched 15% higher year-over-year in the fiscal second quarter as its marketing spend rebounded after being subdued during the worst of the COVID-19 pandemic and as Nike continued to scale up its technology investments.
Its GAAP operating income hit $1.5 billion last fiscal quarter, down 8% year-over-year due to the normalization of its operating expenses. Aided by a reduction in its corporate income tax expense, Nike’s GAAP diluted EPS rose to $0.83 in the second quarter of fiscal 2022, up from $0.78 in the same period in fiscal 2021.
At the end of November 2021, Nike had $15.1 billion in cash, cash equivalents, and short-term investments on hand versus a negligible amount of short-term debt and $9.4 billion in long-term debt on the books, equal to a net cash position of $5.7 billion. Nike also had sizable operating lease liabilities on the books at the end of this period to be aware of. Pivoting to its inventory situation, Nike exited the fiscal second quarter with $6.5 billion in inventory on hand, up 7% year-over-year, and this situation should steadily improve going forward.
Nike utilized its balance sheet strength to repurchase $1.0 billion of its common stock last fiscal quarter through its $15.0 billion share buyback program that was launched back in June 2018. Nike has spent about $6.4 billion repurchasing its stock through that program according to its latest earnings press release. In November 2021, Nike raised its quarterly dividend 11% sequentially, to $0.305 per share, bringing its annualized payout up to $1.22 per share. Shares of NKE yield ~0.7% as of this writing.
Concluding Thoughts
Factory closures in Southeast Asia created major hurdles for Nike, though the firm was able to push through those obstacles with its strong financial position more or less intact. Shares of NKE are currently trading above the high end of our fair value estimate range (which sits at $160 per share) after moving higher in the wake of its latest earnings report. While we appreciate its pristine balance sheet and commitment to rewarding shareholders, we are not interested in adding Nike to any of the newsletter portfolios at this time.
In November 2021, Nike and Dick’s Sporting Goods Inc (DKS) announced a strategic partnership. This partnership will allow customers to use Dick’s Sporting Goods’ mobile app to browse and purchase a wide array of Nike products, including some exclusive products, and also entails utilizing the retailer’s new Dick’s House of Sport store concept to host special events built around Nike products. We are big fans of Dick’s Sporting Goods and members interested in reading about why we like the retailer’s dividend growth prospects are encouraged to check out this article here.
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Callum Turcan does not own shares in any of the securities mentioned above. Chipotle Mexican Grill Inc (CMG), Dollar General Corporation (DG), Domino’s Pizza Inc (DPZ) and The Walt Disney Company (DIS) are all included in Valuentum’s simulated Best Ideas Newsletter portfolio. Dick’s Sporting Goods Inc (DKS) and Home Depot Inc (HD) are both included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.