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Nike is finally starting to regain its stride. The sportswear giant has had a tough run in recent quarters. An inventory glut, coupled with cooling demand in North America and uncertainty in China all weighed on the stock this year.
But there are signs that the ball is back in Nike’s court. For starters it has made headway in clearing out excess merchandise. Inventory stood at $8.7bn at the end of August. That is down 10 per cent compared with the year-ago period. The decline should lend support to future margins as Nike cuts back on sales and promotions and sells more new items at full-price.
Then there is Greater China. The region is one of Nike’s most profitable markets, generating almost half of group operating earnings in 2020. Sales there slumped during the pandemic and have been slow to recover. But things are looking up. Nike’s Greater China sales rose 5 per cent during the most recent quarter. Stripping out the effect of currency headwinds, they were up 12 per cent. This marks the second straight quarter of growth.
Overall revenue at Nike were 2 per cent higher at $12.9bn. While net income fell 1 per cent to $1.4bn, it was a much smaller decline compared to the previous two quarters.
But Nike bulls should not run a victory lap yet. There are still plenty of hurdles that Nike could trip on. Chief among them is reviving growth in its North American market, where it faces stiff competition from running shoe start-up brands such as Hoka. Tighter cost controls are still needed to boost margins. “Demand creation” expense was up 13 per cent during the quarter at $1.1bn, largely because of an increase in advertising and marketing costs ahead of the Olympics next year.
Nike shares, despite a 6 per cent bounce on Friday, remains down 46 per cent from their 2021 peaks. The stock trades on 23 times forward earnings, below its 3 and 5-year average. This looks overdone. Nike remains a good long-term bet for investors.
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