Nike reported Q2 revenue of $13.3 billion, up 17% year-over-year (y-o-y), and ahead of Wall Street's average estimate by $740 million. In the fiscal second quarter, Nike Direct sales were up 16% to $5.4 billion on a reported basis. A drop in revenue in Greater China (-3%) was more than offset by gains in Asia Pacific & Latin America (+19%), North America (+30%), and Europe, the Middle East, & Africa (+11%). Footwear sales were up 25% to $8.50 billion, while apparel sales rose 4% to $3.8 billion. In addition, the company's non-GAAP earnings were $0.85 per share, which beat analysts' consensus estimate by 21 cents and was marginally above the year-ago quarter.
Note: Nike's FY'22 ended on May 31, 2022. Q2 FY'23 refers to the quarter that ended on November 30, 2022.
While the company beat analysts' consensus top- and bottom-line estimates in Q2, investors were concerned that its inventories rose 43% y-o-y to $9.3 billion. The retail stores that buy Nike products and resell them to consumers are sitting on tons of inventory. Management discussed in the earnings call how supply-chain challenges made it hard to predict when orders would get filled, so retailers ordered a bunch of products, taking the better-safe-than-sorry approach. But now that inventory has come in, consumer spending is declining as the economic outlook grows increasingly shaky.
Nike's gross margin also fell 300 basis points to 42.9% in Q2, driven by higher transport, logistics costs, and markdowns on extra inventory. A strengthening dollar also weighed on gross margin.
Below are key drivers of Nike's value that present opportunities for upside or downside to the current Trefis price estimate for Nike:
For additional details, select a driver above or select a division from the interactive Trefis split for Nike at the top of the page.
Nike Inc. is the largest manufacturer of athletic footwear, apparel, and equipment worldwide, by sales, with $46.7 billion in revenues in FY 2022. The company sells its products under several brands, which include Nike, Nike Golf, Converse, Hurley, etc. It typically outsources the manufacturing of its products to Asia and focuses on innovation and designing of products.
The primary sources of Nike's value are footwear and apparel sold under the Nike brand, and together they contribute about 90% of Nike's value. Nike Brand Footwear is more valuable than Nike Brand Apparel and Converse Brand Footwear for the following reasons:
Nike's footwear revenues stood at $29 billion in FY 2022, more than double that of its apparel revenues which were around $14 billion. As the economy improves in the U.S. and Europe, and demand increases in China and emerging markets, we expect footwear revenues to continue to rise. With aggressive marketing and innovation, Nike branded footwear has been able to capture a significant chunk of the global sports footwear market.
In the footwear business, producers and distributors jointly earn a profit per shoe of about 12%, while retailers earn a profit of 13%. By selling through its own retail stores, Nike is able to capture both margins. The total number of Retail stores for Nike in the U.S. has increased from about 325 at the end of the fiscal year 2021 to around 344 stores at the end of FY 2022. Just by looking at the numbers, one can see how much Nike is focused on growing its DTC networks and increasing sales in the stream.
In the last few years, demand for low-performance footwear in the U.S. and Europe has grown significantly. Low-performance footwear refers to footwear that is not intended for athletic use. In this segment, Nike faces competition from low-cost manufacturers that are trying to establish a foothold in the U.S. and other international markets. Nike has gradually increased its focus on selling low-performance footwear through its Converse and Hurley brands. However, the brand is facing stiff competition from competitors like Adidas that threaten to level the playing field.
With the rapidly growing economies of China and other emerging markets such as Brazil, these regions have emerged as key markets for Nike. The company is experiencing strong growth in virtually every one of its business segments in these regions, and the trend is expected to carry forward. China, in particular, is leading the charge with immense growth coming in from the region at a time when demand in North America is shrinking marginally.
NIKE Digital has achieved impressive growth over the last few quarters. Both the SNKRs app - which sells limited-edition shoes using collaborations with athletes, celebrities, and universities - and the newly launched NIKE app are resonating strongly with consumers. For the year, NIKE Direct drove the majority of Nike's incremental revenue growth, with Nike Direct constituting approximately 32% of the company’s total revenues in FY 2021. This share went up to 42% in 2022, with mobile contributing more than 50% of Digital commerce revenue. We expect growth momentum in Nike Digital to continue with increasing digitization and Nike’s increasing investment in order to expand its digital ecosystem.