Nike (NKE) Q3 Earnings 2023

Nike easily beat Wall Street’s expectations for holiday quarter earnings and earnings, though bloated inventory continued to weigh on margins and sales in China fell short of expectations.

Nike, like other retailers, is in the process of clearing excess inventory due to supply chain disruptions and shifting consumer demands that have weighed on its margins.

Gross margins fell to 43.3% for the quarter, down 3.3 percentage points, due to higher discounts and promotions the company used to liquidate its inventory.

While Nike CEO John Donahoe told investors last quarter that he believes the company is past its inventory peak, the company warned that gross margins were expected to take a hit during the holiday quarter.

Inventories rose 16% compared to the same period a year ago to $8.9 billion, which the company attributed to higher product import costs and increased freight costs.

Here’s how the sneaker giant performed in its third fiscal quarter of 2023 compared to what Wall Street expected, based on an analyst survey by Refinitiv:

• Earnings per share: 79 cents versus 55 cents expected
• Revenue: $12.39 billion versus $11.47 billion expected

The company’s reported net income for the three-month period ended Feb. 28 was $1.2 billion, or 79 cents per share, compared to $1.4 billion, or 87 cents per share, a year earlier.

Sales rose to $12.39 billion, up 14% from $10.87 billion a year earlier.

Nike is looking to rebound sales in China, its third-largest market by revenue, as the region recovers from the Covid pandemic. But that hope did not come true. Sales fell 8% in the region to $1.99 billion in the third quarter, despite the end of China’s zero-Covid policy that had weighed on operations.

Wall Street analysts had expected sales of around $2.09 billion, according to StreetAccount estimates.

Sales in China were weak as consumers faced sweeping lockdowns and rising infections. While some activity is starting to pick up again, consumers have not yet returned to pre-pandemic shopping levels, according to a Citi research note.

Outside of China, Nike saw double-digit sales increases in all of its other markets. Sales in North America increased by 27% and in Europe, the Middle East and Africa sales increased by 17% compared to the same period last year. In Asia Pacific and Latin America sales increased by 10%.

In recent years, Nike has worked to build its direct-to-consumer sales and invested heavily in the channel by building out experience stores, developing its loyalty program and growing its e-commerce sales.

Investments in the DTC channel have come at a cost, but sales have continued to grow. Nike Direct sales were up 17% to $5.3 billion during the holiday quarter and Nike digital sales were up 20%.

Selling and administrative expenses increased 15% to $4 billion, most of which was related to payroll-related expenses and Nike Direct costs.

As part of its effort to focus on DTC, Nike has ties to a large number of wholesalers and has relied on those partnerships to offload inventory for the past two quarters. Wholesale revenues were up 12% in the quarter, after growing 19% in the previous quarter.

On Monday, Foot Locker CEO Mary Dillon praised a “renewed” and revived relationship with Nike, its largest brand partner.