Nike (NYSE: NKE) shares fell 7% on Tuesday even though the company beat consensus estimates for FQ2 2022 earnings and sales.
Difficult Quarter as Expected
Nike reported fourth-quarter earnings per share (EPS) of 90c, down from 93c in the year-ago period and above the analysts’ expectations of 81c per share. The total net income for the quarter amounted to $1.44 billion, down from $1.51 billion in the same period last year.
Revenue came in at $12.23 billion, compared to $12.34 billion in the year-ago quarter and above the consensus projection of $12.06 billion.
Going forward, Nike expects Q1 revenue to remain flat or be briefly up compared to the year-ago period as the company continues to grapple with coronavirus challenges in China. On a full-year basis, Nike expects revenue to rise by low double-digits on a constant currency basis.
Nike’s CFO Matthew Friend said the company has taken into account higher transportation and product costs and supply chain expenses in its guidance.
Furthermore, Friend said he feels optimistic as Nike prepares for a fresh fiscal year, adding that production is now above pre-pandemic levels while inventory now flows again into the company’s “largest geographies.”
Nike reported direct sales growth of 7% to 4.8% billion in the fourth quarter, relative to the year-ago period. However, sales in its wholesale business were down 7% at $6.8 billion.
Inventory in the fourth quarter grew 23% to $8.4 billion from the year-ago period as a result of shipping delays due to supply chain constraints.
Total sales in North America, the company’s biggest market, slipped 5% to $5.1 billion in the three-month period, and were down 19% at $1.56 billion in Greater China, compared to $1.93 billion in Q4 2021.
Demand Remains Robust, Better Days Ahead
Nike said demand for sneakers and sports apparel remained resilient in the fiscal fourth quarter despite headwinds from China’s zero-COVID policy and record high inflation. Additionally, the sportswear giant said challenges like shipping delays and surging transportation expenses continue to weigh on the company’s operations.
The latest earnings report comes amid a key strategic transition for Nike as the company focuses more on selling merchandise directly to shoppers while cutting back on wholesale sales. The shift in strategy carries a certain risk as it could provide Nike’s rivals with additional shelf space and ultimately better sales at wholesale partners.
Meanwhile, Mad Money host Jim Cramer believes that Nike is much more appealing to investors than analysts think, despite its mixed Q4 results.
“I’m not going to tell you this was a great quarter. … But, and this is a big but, I don’t think the results were as bad as today’s 7% decline [suggests],” Cramer said. “The long-term story remains intact.”
He said the company’s stock has already factored in potential downside risks but is yet to do so with any potential upside.
“That doesn’t necessarily mean Nike’s a screaming buy here. But I see something with much better risk-reward than it’s getting credit for, and I would indeed start a position tomorrow if it were to go down from here,” he added.
Cramer said that the Chinese market is currently the biggest issue for Nike and even then, the company’s remarks for that region were “more bullish than not.”
Even though Wall Street has slashed its price objectives for NKE, the reduced targets point to a change in the market that is larger than the company, Cramer added.
He previously said that the earnings guidance was too elevated and needed to shrink before the market formed a “sustainable bottom.”
Summary
Nike shares fell on Tuesday after a soft earnings report but fundamentals still remain resilient. In an improving macro environment, Nike stock could see a meaningful rally given that shares are down over 35% since the start of this year.
