Nike (NKE 1.23% ) investors had low expectations ahead of the company’s earnings announcement over the holiday season. Growth stagnated in the fiscal first quarter, which ends in late November, as a slowing Chinese market weighed on global results. Wall Street was also not enthusiastic about the prospects for the U.S. division, due to supply chain and inventory issues, soaring costs and potential staff shortages.
Nike eased many of those concerns this week by marking a return to global sales growth in the second quarter, which ended in late February. Its holiday season results also helped explain why the company is moving faster away from its traditional wholesale strategy toward a direct-to-consumer model.
Let’s dive into it.
Nike recorded a further decline in revenue in China, its second largest market. Stores see it as a reduction in traffic due to pandemic restrictions.
But this division is steadily recovering and the shoe giant is expanding in Europe and the United States, so that overall sales increased by 8% compared to the stable result of the last quarter. On a conference call, management said these gains were fueled by a flood of innovative product launches, higher prices and strong demand in the digital sales channel.
A big factor in its growth has also been fixing the supply chain. Nike said on the conference call that it cut transit times by nearly four weeks, putting it in a much better inventory position than most of its rivals.
We now know why Nike is moving away even faster from its traditional model, which involved selling products to retailers like Foot locker in favor of a direct merchandising approach. This setup carries more inventory and supply chain risk. But it also promises to accelerate growth while boosting profitability.
The digital division grew to 26% of total sales this quarter, from 23% a year ago. Nike also saw higher profitability on these online sales, helping to boost overall gross profit margin despite skyrocketing transportation costs.
These numbers help explain why the company is pulling out of its longstanding partnership with Foot Locker to deliver more products itself. Yet the old retail approach isn’t going away. “Our wholesale partners continue to play a very important role in our go-to-market strategy,” said CEO John Donahoe.
Nike’s short-term outlook received some significant upgrades this week. Of course, sales are still on track to grow in the mid-single digit range, on par with the lowered guidance that management asserted three months ago. But those gains likely reflect market share growth as peers grapple with more inventory issues. Nike also raised its profit forecast thanks to higher prices and a reduced customer return rate.
The fiscal fourth quarter will likely post weak year-over-year results, primarily due to continued weak results from China. But management is optimistic about the future. The first detailed outlook for fiscal 2023 will arrive with next quarter results, but for now, executives say they expect “another year of strong growth.”
Investors do not have to take these words at face value. They are supported by several positive trends, including the increase in gross profit margin and improving inventory levels.
It’s also a great sign of customer satisfaction as people return athletic shoes and apparel less frequently and happily pay for premium products. These gains will likely translate into faster growth and improved returns for shareholders going forward.
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