Image: Nike’s shares have faced considerable pressure from the beginning of 2022, and its outlook for the first half of fiscal 2025 wasn’t great.
By Brian Nelson, CFA
On March 21, Nike (NKE) reported better-than-expected third quarter fiscal 2024 results. Revenue during the quarter advanced modestly on a reported and currency-neutral basis as revenue from its Nike brand rose 2%, while sales for Converse fell 19% on a reported basis. Nike showcased its pricing strength in the period, with the company’s gross margin advancing 150 basis points, to 44.8%, despite higher input expenses and restructuring charges. Net income fell 5% in the fiscal third quarter, while diluted earnings per share dropped 3% in the period.
Nike ended the quarter ending February 29 with $10.6 billion in cash and equivalents and short-term investments and $8.9 billion in notes payable and long-term debt, so Nike has a nice net cash position on the books. The company managed inventory quite well in the period, too, with inventories for Nike falling 13% from the prior year period due to a decline in units. In the third quarter, Nike returned $562 million in dividends and $866 million in share repurchases. Nike has now raised its dividend for 22 consecutive years. The firm continues to buy back stock under its four-year $18 billion share repurchase program approved in June 2022.
Though the company’s fiscal third quarter wasn’t bad, management noted on the call that its business is not performing to its potential. CEO John Donahoe mentioned that the firm needs to continue to focus on product innovation and bolder brand marketing. Donahoe noted that the company is “well on (its) way to building a multiyear cycle of innovation that’s bringing freshness and newness to consumers,” however. Management was upbeat on the call about its Air platform, pointing to new breakthroughs with an eye toward opportunities as it approaches the Olympics in Paris this summer.
Here’s what management had to say about trends in Greater China on the conference call:
In Greater China, Q3 revenue grew 6%, in line with our revised expectations that we shared at the end of last quarter. NIKE Direct declined 1% with NIKE stores growing 6% and NIKE Digital declining 13%. Wholesale grew 12%. EBIT grew 3% on a reported basis with multiple points of impact from foreign exchange headwinds.
Chinese New Year sales grew year-over-year with our NIKE and Jordan Year of the Dragon Express Lane collections driving excellent sell-through. And retail sales with our partners grew double digits in Q3 versus the prior year. Kids led our growth in the quarter with performance dimensions up strong double digits. In basketball, Book 1, Kobe and G.T. Cut 3 launch with strong sell-through.
Looking ahead, Nike expects revenue to grow modestly at a pace of ~1% for fiscal 2024 and to deliver on previously issued earnings guidance that it outlined at the beginning of the fiscal year. Full-year gross margins are expected to expand roughly 120 basis points as Nike continues to benefit from pricing strength and better cost management. For fiscal 2025, Nike expects revenue and earnings growth with operating-margin expansion, excluding restructuring charges in fiscal 2024, though it did note that it expects revenue during the first half of fiscal 2025 to be down “low single digits.”
We’re huge fans of Nike’s consecutive dividend growth track record, but uncertainty regarding the future pace of sales growth in China, growing competition from the likes of Lululemon (LULU) and Vuori, and macro-driven weakness expected in the first half of fiscal 2025 leave us on the sidelines for now. Shares yield ~1.5% at the time of this writing.
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Tickerized for NKE, LULU, UA, UAA, FL, SKX, ADDYY, DECK
Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, RSP, SCHG, QQQ, QQQM, and VOO. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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