To The Moon

$Nike(NKE)$ reported FY23 Q3 earning after Mar.21,It is the first report for Greater China after pandemic (December 2022-February 2023).

Overview

Revenues: 12.39 billion US dollars, a year-on-year increase of 14%, better than the market expectation of 11.47 billion US dollars;

• By channel, NIKE Direct's revenue was 5.3 billion US dollars, a year-on-year increase of 17%, and an increase of 22% on the basis of currency neutrality; NIKE Brand Digita's revenue increased by 20% year-on-year and increased by 24% on the basis of currency neutrality; Wholesale revenue was 12% year-on-year and increased by 18% on the basis of currency neutrality;
• By brand, NIKE brand revenue was US $11.8 billion, a year-on-year increase of 14%, and an increase of 19% on the basis of currency neutrality, achieving double-digit growth in North America, Europe, Africa, the Middle East and Asia-Pacific Latin America; Converse's revenue was $612 million, up 8% year-on-year and 12% on a currency neutral basis.
• By region, North America's revenue was US $11.9 billion, up 23% year-on-year, Europe, Africa and the Middle East's revenue was US $7.8 billion, up 10% year-on-year, Greater China's revenue was US $7 billion, down 10% year-on-year, and Latin America's revenue was US $4.85 billion, up 1% year-on-year.

Profits: The operating cost was USD 7.02 billion, up 21% year-on-year, exceeding the growth rate of revenue. Gross profit margin fell to 43.3%, down 3.3 percentage points from the same period of last year. The company increased price reduction and promotion efforts in order to clean up inventory;

At the same time, the marketing expense 920 million US dollars, an increase of 8% year-on-year, and it was lower than 10% for four consecutive quarters; Management expenditure was US $3.96 billion, up 15% year-on-year.

Comparable EBIT was 1.43 billion US dollars, down 12% year-on-year; The net income was US $1.24 billion, down 11% year-on-year; Diluted earnings per share was US $0.79, which was better than the market expectation of US $0.55 and US $0.87 in the same period last year.

Investment Highlights

Excess inventory leads to a decline in profit margins. From the CPI breakdown in the United States in recent months, it can be seen that the price increase of clothing is far below the average level, because most retailers are facing the problem of overinventory, so they need to cut prices to clear their inventory. Like other retailers, Nike has been digesting excess inventory caused by supply chain disruptions and changes in consumer demand, which has been affecting its profit margins. Q3 inventories rose 16% from a year earlier to $8.9 billion. At the same time, the rising input cost of products and the rising freight cost will also increase the operating cost.

Growth in Europe and America remains strong, thanks to the price increase of new products and the current wage level with high growth rate. Of course, after the epidemic, the demand for sportswear has been stronger than that of traditional clothing.

The recovery situation in Greater China is not optimistic, with footwear revenue droping 3.7%.After a year-on-year rebound in the previous quarter, the decline continued, while clothing fell by 16%, accessories fell by 36%, and the overall decline was 8%, but currency neutrality rose by 1%. However, it should be noted that Nike's Q3 covers December-February, including half of the shopping season and Spring Festival, and these three months are the first three months after the epidemic, but the rebound is not as high as expected.At present, the market expects that 23Q4 and 24Q1 will reflect the recovery of the pandemic.

Estimate and valuation

The company predicts that the revenue growth in Q4 of fiscal year 2023 will be at a low double digit year-on-year, and the annual revenue growth in fiscal year 2023 will be at a median double digit year-on-year.

At the same time, the company also predicts that the gross profit margin of Q4 in fiscal year 2023 will decrease by 150 basis points, or 42%, compared with the same period of last year, and the gross profit margin of fiscal year 2023 will decrease by 125 basis points compared with the same period of last year.

At present trailing P/E of is 36 times, which is higher than the average of 28 times in the same industry.It is at the same level as Lululemon's, but LULU's growth is faster.

The average market target price is $135. At present, the company's share price is $125. In fact, the space is very limited.

We believe that with the weakening of inflationary pressure and the slowdown of wage growth in North America, the recovery of Greater China in 2023 will be the key to whether Nike can continue to support the current valuation.