Is Nike Stock a Buy After Better-Than-Feared Q3 Results?

Nike (NYSE: NKE) shares have rebounded in recent weeks to trade around 15% higher compared to the 18-month low set earlier this month.

How Did Nike Perform in Q3?

The rebound in Nike stock has started after the retailer reported better-than-expected earnings per share (EPS) and revenue for the third quarter. The apparel and footwear giant reported $10.87 billion in revenue for Q3, up 5% YoY and beating the consensus estimates of $10.61 billion.

Revenue in North America came in at $3.88 billion, up 8.9% YoY and above the expected $3.84 billion. EMEA revenue stood at $2.78 billion, up 6.5% YoY, and compared to the consensus projection of $2.74 billion.

Revenue in Greater China stood at $2.16 billion, down 5.2% YoY, though above the analyst expectations of $2.09 billion. Nike reported the Asia Pacific & Latin America revenue of $1.46 billion, up 11% YoY and topping the estimated $1.36 billion.

Footwear revenue totaled $6.66 billion, up 2.4% YoY and in line with the consensus estimates, while apparel revenue came in at $3.23 billion, up 9% YoY and above the $3.05 billion consensus.

The company reported EPS of 87c in the quarter, down from 90c in the year-ago period and above the analyst consensus of 72c per share. Direct sales were reported at $4.6 billion, up 15% YoY.

Gross margin in Q3 stood at 46.6%, compared to 45.6% in the year-ago quarter and analyst expectations of 46.5%. North America EBIT (earnings before interest and tax) totaled $967 million, down 0.3% from the year-ago quarter and short of the estimated $1.04 billion.

EMEA EBIT was $713 million, up 34% YoY and well above the analyst consensus of $568.8 million. EBIT in Greater China was $784 million, down 19% YoY and missing the consensus estimates of $833.6 million.

“Marketplace demand continues to significantly exceed available inventory supply, with a healthy pull market across our geographies,” said Nike CFO Matt Friend.

All About China

Last week, Nike said its operations in China are showing positive signs after a recent backlash against Western companies among consumers in that market. The U.S. company appears to be handling macroeconomic issues well and its better-than-anticipated performance could help other global apparel brands as well.

Nike still hasn’t released an official outlook for its upcoming fiscal year as many different factors and market volatility could affect current trends. Nike’s fiscal year begins in June when the company is also expected to report its Q4 results.

Tom Nikic, an analyst at Wedbush said investors’ biggest concern about Nike stock was the Chinese market, which is now also steering “in the right direction.”

“With significant brand momentum and long term [earnings] power-driven by the direct-to-consumer initiative, we believe Nike remains one of the highest-quality, highest-visibility growth stories in our space,” said Nikic.

Nike has recently teamed up with two retail distributors in China – Top Sports and Pou Sheng. The move helped the company reinforce its footprint in the region and lure back some of its customers. Its brand campaign for the Beijing Olympics also helped Nike increase its reach in China.

What are Analysts Saying?

Wells Fargo analyst Kate Fitzsimons, who has an Overweight rating on Nike shares, said the company’s financial results point to its “strong fundamentals” and represent a clear signal for staying bullish on its stock in FY2023.

Nike’s improving trends in the Chinese market are promising, however, it is expected that the underlying demand trends will carry some uncertainty until the summer, according to Morgan Stanley analyst Kimberly Greenberger.

The company’s strong Q3 results mean that Nike reinforced its wholesale footprint, which is expected to add to its DTC growth, she added.

Evercore ISI’s analyst Omar Saad said Nike’s Q3 report was a “big sigh of relief”, while the better-than-expected performance in China will likely diminish concerns that Chinese consumers will steer clear of Western brands.

Nike’s management’s comments on the impact of the war in Ukraine are also expected to ease concerns, Saad added.

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