To The Moon

Nike has announced its Q3 earnings for the 2023 fiscal year. The report shows that Nike's revenue for Q3 grew 14% year-over-year to $12.39 billion, exceeding market expectations of $11.47 billion. However, net profit fell by 11% to $1.24 billion, while diluted earnings per share were $0.79, beating the market's expected $0.55 but lower than the previous year's $0.87.

Like other retailers, Nike has been dealing with excess inventory caused by supply chain disruptions and changing consumer demand, which has been affecting its profit margins. The report shows that Nike's Q3 gross margin fell to 43.3%, down 3.3 percentage points from the same period last year. The reason for this decline is that the company increased discounts and promotions to clear out its inventory. Nike CEO John Donahoe told investors during the second quarter that although he believed the company had passed its peak inventory, he expected gross margins to be impacted during the holiday season.

The report shows that Q3 inventory grew 16% year-over-year to $8.9 billion, which the company attributed to rising product input costs and freight charges. However, Nike executives said during the earnings call that they were "increasingly confident" that Nike would end the fiscal year with healthy inventory levels. They also added that given the strong sales momentum, they expected "less inventory than anticipated."

Breaking down the revenue by region, North America's revenue was $4.913 billion, up 27% year-over-year. Europe, Middle East, and Africa (EMEA) revenue was $3.246 billion, up 17% year-over-year. Greater China revenue was $1.994 billion, down 8% year-over-year. Asia Pacific and Latin America revenue was $1.601 billion, up 10% year-over-year.

Nike expects high single-digit revenue growth for the fiscal year 2023, up from its previous forecast of mid-single-digit growth, thanks to a strong Q3 performance. However, the company also expects a 2.5 percentage point decline in gross margin for the fiscal year, at the low end of its guidance range, reflecting Nike's efforts to clear excess inventory and address other costs.

In addition, Nike expects Q4 revenue growth to be flat to low single digits. Nike's CFO Matthew Friend said the company is planning in a "cautious manner" given consumer confidence and economic uncertainty. "We've been successful navigating these kinds of cycles before, and we're prepared for the volatility in front of us," he said.

In recent years, Nike has been focused on building up its direct-to-consumer (DTC) sales, investing heavily in this channel by creating experiential stores, developing loyalty programs, and increasing e-commerce sales.

Nike's investment in the DTC channel has come at a cost, but its sales are still growing. Q3 data shows that DTC channel sales grew 17% YoY to $5.3 billion. E-commerce sales grew 20% YoY, accounting for 27% of total sales, up from 9% at the end of FY 2019. As a result, Nike's Q3 sales and administrative expenses increased 15% YoY to $4 billion, with much of the increase related to wages and DTC costs. The company expects spending to increase by 10% for the full year.

Furthermore, over the past two quarters, Nike has relied on partnerships with wholesalers to manage inventory. Wholesale revenue increased 12% YoY in Q3, following a 19% increase in the previous quarter. However, Nike says it has reduced its inventory commitments for spring and summer in order to manage excess inventory, and expects wholesale revenue growth to slow in the coming quarters.

Investors should take note of Nike's strong performance in the DTC channel, which has helped drive overall sales growth. However, the company's investment in this channel has come at a cost, with increased expenses related to wages and DTC costs. Nike's partnership with wholesalers has helped manage inventory, but revenue growth in this channel is expected to slow in the coming quarters.

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