Picture: REUTERS
Picture: REUTERS

New York — After hitting a record high on Thursday, Nike is finding it harder to keep investors happy.

Despite posting quarterly results that sailed past Wall Street estimates, the shares dipped in late trading, suggesting some investors were looking for an even bigger upside surprise.

Fiscal second-quarter profit rose to 70c a share, Nike said, beating 58c average of analysts’ estimates. The company overcame headwinds from tariffs that were stiffest in the period, boosting sales by 10% to $10.3bn and topping projections.

“Our brand is connecting deeply with consumers everywhere,” CEO Mark Parker, who will step down next month, said on a conference call. “Our innovation is helping athletes prove that there are no limits. We’re challenging the conventions of retail at every turn.”

Nike executives said they expect third-quarter revenue to grow by a high, single-digit percentage, and reiterated the same expectation for the full year. The company expects third quarter gross margin to remain flat year-on-year, at about 45.1%.

Parting ways

While Nike routinely beats profit estimates, its shares don’t always follow suit. The company has exceeded estimates in every quarter but one going back to mid-2012, but the stock has declined about a third of the time.

Shares of Nike fell as much as 3.1% in extended trading before recovering somewhat. The stock touched an all-time high in regular trading on Thursday, closing at $101.15.

Two possible negatives: profit margins and inventories. Nike’s gross margin expanded to 44%, short of estimates of 44.1%. The margins have grown as the company focuses more on selling direct to its customers.

CFO Andy Campion said on the call the margin numbers are the result of a lot of factors, many not directly tied to product. Tariffs cut the figure by 40 to 50 basis points, while investments in the company supply chain and apparel distribution also added to the pressure, along with currency fluctuations.

“There are a lot of puts and takes within margin in any given quarter,” Campion said. “I would tell you not to focus on a quarterly margin expansion result, especially in these times, as indicative of a trend.”

Rising inventory

Inventory rose 15% to $6.2bn, an all-time high. Nike said the jump was a result of strong global demand, as well as a higher rate of on-time deliveries from factories. The Bloomberg MODL estimate for inventory growth was 6.1%.

It was a busy quarter for Oregon-based Nike. The company named a new CEO, recently sold the surfing brand Hurley, and also drew criticism from vice-president Mike Pence over its business in China.

In October, the company shuttered its elite Oregon Project distance running team after coach Alberto Salazar was suspended for doping violations. Weeks later, a number of former Nike runners claimed they were verbally and emotionally abused by Salazar while with the Oregon Project.

Analysts remain optimistic about Nike’s digital transformation, specifically its push to sell more product directly to consumers, without a retail middleman. In 2019, Nike Direct sales grew twice as fast as its wholesale business, and now account for about 32% of all sales. That number should continue to grow.

Central to that growth is the proliferation of the Nike app, which is at the heart of Nike’s new stores, products and acquisitions. In its first quarter, the company expanded its app to 13 countries in Europe, the Middle East and Africa; last quarter, it launched in China.

In November, Nike said it would stop selling products on Amazon, the end of a two-year pilot programme. That change comes amid a broader move by Nike to limit its retail partners — opting instead to work more closely with a handful of select companies, and put more resources behind it’s direct-to-consumer business.

Over the quarter, Nike Direct sales grew 17%. Within that category, digital sales were up 38%. Said Campion, “We are extending Nike’s digital advantage, and we are positioning Nike for even greater competitive separation over the long term.” 

Bloomberg