Nike (NKE) released the firm's fiscal third quarter financial results on Tuesday afternoon. For the three month period ended February 28th, Nike posted GAAP EPS of $0.79 on revenue of $12.39B. These top and bottom line numbers both easily exceeded Wall Street's expectations, while the revenue print was good enough for year over year growth of 14%.
Cost of sales increased 21% to $7.019B, bringing gross profit up 6% to $5.371B and gross margin down to 43.3% from 46.6% for the year ago comp. The firm explains that the 330 basis point decrease in gross margin was primarily due to higher markdowns to liquidate inventory, unfavorable currency exchange rates, elevated input costs and increased freight and logistics costs. These negatives were partially offset by the firm's strategic pricing actions.
That said, inventories were still up 16% year over year to $8.905B, so the work here has just begun and the potential for continued or even more aggressive markdowns is obvious.
Total operating expenses increased 15% to $3.959B as net income decreased 11% to $1.24B. That's what took the period's EPS (that did beat Wall Street) down 9% from the year ago comp. As for the company's business units. Nike Direct sales grew 17% (22% currency neutral) to $5.3B, as Nike Brand Digital sales increased 20% (24% currency neutral), while wholesale revenue increased 12% (18% currency neutral).
Specifics
- Footwear sales increased 20% (25% currency neutral) to $7.97B.
- Apparel sales increased 5% (10% currency neutral) to $3.381B.
- Equipment sales increased 3% (8% currency neutral) to $403M.
- North America generated sales of $4.913B, up 27%.
- Europe, Middle East & Africa generated sales of $3.246B, up 17% (26% currency neutral).
- Greater China generated sales of $1.994B, down 8% (+1% currency neutral).
- Asia Pacific & Latin America generated sales of $1.601B, up 10% (15% currency neutral).
Guidance
If you're trying to find any corporate guidance in the press release, don't bother, Nike CFO Matthew Friend did provide some guidance during the call however. Friend started out mentioning "uniquely strong consumer demand" and then sort of hedged that in also mentioning that the firm is monitoring 'building pressure on consumer confidence" and the "uncertainties of the macro environment."
The firm now expects reported revenue for fiscal 2023 to grow high-single digits, with a rough 600 basis points worth of currency related headwinds. For the current quarter (Nike's FQ4), this will translate into flat to low-single digit revenue growth. The firm expects fiscal 2023 gross margin to decrease roughly 250 basis points, which is at the low end of previously given guidance. This will be largely due to continued actions taken to reduce inventories by fiscal year's end.
Friend also stated that he sees higher supply chain costs and SG&A expenses to increase about 10%. The firm will provide guidance for fiscal 2024 in three months, at the firm's next earnings call.
Fundamentals
If Nike released a statement of Cash Flows, I can not find it. As far as I can tell, it's not in the material that the firm released. I see that the ancillary services that I use that did post the firm's statement of income and balance sheet, did not also post the statement of cash flows. You folks know I just love when firms make key financial data difficult to find. In the call there was no mention of capital expenditures. There was one mention of free cash flow that briefly said that it improved. In the press release, there is one part of one sentence that states... "Cash provided by operations was more than offset by share repurchases, cash dividends and capital expenditures." That sure sounds like a post-free cash flow deficit to me.
Without all of the information that should be provided with any earnings release, we'll turn to the balance sheet. Nike ended the quarter with a cash position of $10.802B (-20% over 12 months) and inventories valued at $8.905B as mentioned above. This was up 16%. That brings current assets down (-3%) to $26.035B. Current liabilities increased 8% to $9.548B, including $500M in long-term debt labeled as current.
This puts the firm's current ratio at 2.73, which is still very strong, but down from 3.3 since last year at this time. The firm's quick ratio now runs at 1.79. This too, is a healthy number, but also down from last year's 2.18.
Total assets amount to $38.294B. including just $558M in goodwill and other intangibles. This is obviously no problem. Total liabilities less equities come to $23.763B. Of this number, $8.8.925B is in the form of long-term debt. The firm could pay this out of pocket if need be.
This is no doubt still a very strong balance sheet that has obviously been put to use during a difficult period. It's not a reason for investors to run for the hills, but investors must keep an eye on the state of rapid deterioration in quality that this balance sheet has experienced over the past 12 months. I don't think anyone wants to see another year like that.
Wall Street
Oddly, I have not found any reaction whatsoever for the community of analysts to this release. About a week ago, five highly rated analysts reiterated "buy" or buy-equivalent ratings on NKE with price targets between $130 and $145, but not a peep out of anyone last night or this morning. Odd. Interestingly, last week, Geoff Lowery of Redburn Partners who is rated at just two stars by TipRanks, initiated NKE with a "sell' rating and a $100 target price.
My Thoughts
The stock trades at 34 times forward looking earnings, which is terribly expensive. They had a better quarter than expected, but still one that compares poorly to the year ago comps. The balance sheet is still strong, but less so. The firm paid out dividends of $528M and repurchased $1.5B worth of stock, despite implying that it had to go beyond free cash flow in order to do so.
Oh, and the guidance does anything but inspire. More inventory woes. More forex woes. Increased expenses. I can not find anything here that would provoke me to put my hard earned money into this equity at this valuation. Revenue growth is kind of back, but margin continues to lose ground. That's not enough.
Readers can see that NKE hit stiff resistance at the 50% retracement (half way back) level of the November 2021 through the October 2022 selloff.
Since early January, NKE has based in between $115 and $130. Those would be my pivot and panic points if I were long this name. Personally, I think the shares are in need of a serious haircut. I have no interest until what I see this stock do when it tests the 200 day SMA (simple moving average) at $109.
An interested investor could go out three months and maybe sell the June 16th NKE $110 puts for a rough $2.35, while buying a like amount of the April 16th $100 puts for about $1.05. At those premiums, the investor would bring in a net credit of $1.30, while opening him or herself up to equity risk at a potential net basis of $10870, while already having had protected themselves to the downside at $100.
