3 Things Stand Out From Nike’s Q3 Report

The rumors of Nike’s (NKE) demise were greatly exaggerated. 

The Oregon-based footwear and apparel giant reported Q2 2023 results on Tuesday after the close. The numbers were much better than expected. NKE stock is up more than 14% in early Wednesday trading. 

There is a lot to unpack from the company’s latest report. However, for those investors considering buying its stock on the news, three things stand out about Nike’s earnings.      

Analysts Were Way Off 

According to Barchart.com’s analyst ratings, 27 Wall Street professionals are currently covering its stock. Of those 27, 19 rate it a Moderate or Strong Buy, with an average rating of 4.30 out of 5.0. Nearly 30% of the analysts are on the fence with a Hold rating.
The mean target? $120.62. If Nike’s stock stays hot for the remainder of the day, it will likely hit the mark 12 months ahead. 

Despite being generally optimistic about Nike, analysts dropped the ball with their modeling in the second quarter. 

On the top line, Nike’s revenue of $13.32 billion was 6% higher than the analyst consensus estimate of $12.57 billion. On a currency-neutral basis, revenues jumped 27% over last year. On the bottom line, Nike earned 85 cents in the quarter, 21 cents higher than analyst expectations. That’s a 33% beat. 

It’s not as if Nike’s a new kid on the block. You would think analysts would be more in tune with the company’s financial and operational situation. That’s a testament to Nike and the fact that there are plenty of winners and losers in these inflationary times. 

Picking the winners in 2023 and beyond -- whether it be do-it-yourself investors or the pros on Wall Street -- won’t be easy.  

Digital Sales Continue to Hum

Nike Digital’s revenues jumped 34%, excluding currency, over Q2 2022. Broken down by region, digital sales increased 31% in North America, 62% in EMEA (Europe, Middle East, and Africa), 9% higher in China, and 35% in APLA (Asia Pacific Latin America). 

In Q2 2022, the Nike Brand digital sales were $2.7 billion, up from $2.4 billion a year earlier, excluding currency. Because they rose 34% in the latest quarter over last year, I estimate the company’s digital revenues in this year’s second quarter were $3.6 billion, or 27.2% of its $13.3 billion overall revenue.

Those are all very healthy numbers. 

CEO John Donahoe had some interesting comments in the Q2 2023 conference call about its growing membership of customers who engage with the company. 

“Q2 was our biggest member demand quarter ever, and we saw double-digit growth in member engagement. Today, we have roughly 160 million active members who engage with us on a regular basis,” Donahoe stated. 

“More importantly, our repeat buying members who are more engaged, spend more and spend more frequently are growing at an even faster pace of high double-digits as they continue to be an important growth engine for our business.”

Donahoe also stated that its members generate more than 50% of the in-store demand. Further, members who shop in-store and online, generate significantly more than those who shop in one channel or the other but not both.

Digital plus in-store retail equals a more substantial customer base. 

Converse Ought to Be Spun Out

I own several Converse shoes, including two waterproof pairs for winter and no Nike shoes. The Converse name remains relevant to many consumers, but when you contribute less than 5% of quarterly revenue, you get lost in the shuffle. 

However, in the first six months of fiscal 2023, Converse generated $1.23 billion in sales, 10% higher than in the first six months of last year, excluding currency. In terms of profitability, its EBIT (earnings before interest and taxes) profit in the year's first half was $362.0 million, 8% higher than a year earlier.

That’s an EBIT margin of 29.4%, 950 basis points higher than the much bigger Nike brand.

Converse could do a lot more to stand out in a crowded market as a separate company. Sure, it loses its sugar daddy, but it gains the independence necessary to continue growing beyond the status quo. 

Nike’s valued at 3.34x sales. Assuming Converse’s multiple was half that, its market cap as an independent company could be as high as $5 billion, giving it a greater valuation than Under Armour (UAA).

Converse deserves to be set free. 

While I doubt it will happen, it’s a good problem for Nike to have.  

The Bottom Line for Nike

It was a good quarter for the company despite a 43% YOY increase in inventories compared to a 27% increase in sales. That’s not something you want to see very often. 

However, this was an exceptional situation. As Donahoe said, the company’s inventory peak is behind it, allowing Nike to focus on an omnichannel future with sustainable, profitable growth. 

Assuming a recession is fleeting in 2023, Nike shares could revisit the $170s in the year ahead. 

It’s a long-term buy. 

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