Despite rising 16% over the past six months, besting the 2% rise in the S&P 500 index, shares of Nike (NKE) still looks relatively cheap when compared to the company’s long-term potential, particularly with its Direct-to-Consumer (DTC) business.
Nike's performance, while solid, doesn’t fully reflect the operational excellence the company has displayed over the past several quarters, suggesting this could still be a buying opportunity. The global apparel and footwear giant will report third quarter fiscal 2023 earnings results after the closing bell Tuesday. Aside from inflation headwinds, which has impacted operations, the company has also navigated issues related to supply chains.
However, the DTC business has been a standout performer. That segment is not only a more profitable business for Nike than the wholesale segment, DTC also gives Nike more pricing power while allowing the company to affect the consumer buying experience. As it stands, DTC now accounts for 43% of the company’s total revenue, compared to just a little over 27% six years ago. In addition to the DTC business, Nike’s online distribution and its online channels has been an area where the company has invested heavily.
There is an estimated 160 million active members in the company’s online membership and loyalty programs. These collective initiatives has helped Nike stay well ahead of the competition in areas such as running, basketball, and the general footwear brand. As such, Nike’s brand and global presence in the athletic footwear market makes it a strong stock to hold for the long term of 12 to 18 months. On Tuesday the shares will react positively if the company can deliver a top and bottom line beat along with positive guidance.
For the quarter that ended February, Wall Street expects the Oregon-based apparel company to earn 54 cents per share on revenue of $11.44 billion. This compares to the year-ago quarter when earnings came to 87 cents per share on revenue of $10.87 billion. For the full year, ending in May, earnings are expected to be $3.16 per share, down from $3.75 a year ago, while full-year revenue of $50.07 billion would rise 7.2% year over year.
The company continues to rely on that brand advantage, reinforcing it both through strategic marketing campaigns and sponsoring well-known athletes. The latter strategy has created strong demand for its products across the globe as consumers develop an increased focus on health and wellness as a result of the pandemic. The company also stands to benefit from the re-opening in China, which has relaxed some of its Covid restrictions to spur economic growth.
There is an estimated 600 to 700 million consumers in the Greater China region that can spur Nike sales in the coming quarters. And meanwhile in North America, the company is expected to log strong sales thanks to new product launches and because of the DTC success, which has helped Nike reduced its North American wholesale accounts by roughly 50% over the past five years. As a result, the company has produced strong gross profit margins over the past few quarters, even amid rising inflation.
In the second quarter, the company beat on both the top and bottom lines, with revenue of $13.32 billion and EPS of 85 cents, which beat by 21 cents. Q3 gross margin fell 300 basis points to 42.9% of sales, topping the 42.1% consensus. The margin decline was driven by higher markdowns to liquidate inventory. These were offset by improved Direct revenue, which rose 16% year over year to $5.4 billion, while Digital revenue rose 12% year over year.
To keep the momentum going, the company on Tuesday will need to deliver a top and bottom line beat and offer strong guidance for the next quarter and full year.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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