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Is Nike a Buy After Spectacular Q2 Earnings?

consumer discretionary Dec 26, 2022

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Current Price: $115

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Stock: Nike ($NKE)

Last week, we got the first indicator of solid news about retail from the good folks over at Nike.

After a year of fear that retailers would languish under expanded inventories and a weaker consumer, Nike came out with an earnings report last week that massively defied expectations and demonstrated that they have their inventory more under control than ever. 

In a year where costs exploded, Nike managed a masterclass in supply chain management that allowed them to grow revenue and margins well beyond the street's wildest expectations. 

When in doubt, you can always bet on the strongest of brands to weather these macro storms.

We're really excited to see the clouds starting to part in this latest Nike earnings report. It feels good to open up to more retailers again while we stare down the barrel of an extended downturn. 

There's a lot more to cover on why this stock can deliver strong returns, so let's get into it 👇 

Nike Has Past Peak Inventory:

We've talked about the inventory problem a lot in past retail updates. Every retailer is being weighed down by excess inventory, and Nike is no exception with their inventory burden sitting at a brutal $9.3 billion. 

Excess inventory like this is bad all around. It ties up capital and forces brands to eat into their margins by using markdowns and other liquidation strategies to move excess product.

The main tailwind driving Nike's stock up though is that inventory growth is finally slowing down.

Last quarter, Nike's inventory glut increased by 65%, while it only grew by 54% this quarter. This is combined with expectations that inventory grows a lot more right before the holiday season as consumers save their dry powder for big Christmas discounts and whatnot. 

Nike has also managed really strong cost-cutting initiatives and a smart ordering strategy to cut front-end supply by a significant amount -- meaning they've got a solid chance to have their inventory excess under control by the end of Q2 (June).

This is the biggest win in terms of getting Nike back to pre-covid margin growth.  And a huge contributor to that is our next point: 


Nike is Becoming a DTC Powerhouse:

Nike has lived and died on wholesale pricing.

They sell huge orders to massive retailers and liquidate what they can't. Nike was pretty notorious for not having a strong e-commerce strategy -- going as far as to start and stop selling their products on Amazon 3 times over.  

Turning a classic wholesaler into a DTC business is not easy -- especially at the scale at which Nike operates.

But after a few starts and stops, Nike managed to pull off 25% DTC growth YoY despite falling consumer demand.

This is a huge win that will help Nike control its destiny as we keep moving through this downturn and full digital transformation. More and more, it is absolutely WILD to watch traditional retailers using this period to transform their operations and find the strength necessary to go toe-to-toe with Amazon in e-commerce.

Whether this is an epic bag fumble by Bezos-corp or one of the great turnarounds in the history of commerce, remains to be seen. 

DTC managed to push Nike back to solid revenue growth as well.

All regions managed to pull upwards of 15% revenue growth and this is the first time Nike saw an increase in revenue in China since 2020. While Nike is still growing its strong wholesaler business, this hybrid model is going to give them a lot of breathing room as we ramp into 2023.


Nike Outlook:

DTC still looks shaky for Nike though. We want to see that growth accelerate, especially since Nike had the surprise confidence to boost their revenue guidance for the year.

Their Q1 earnings call is going to be critically important as we maintain our position moving forward. 

More importantly, this growth in China can just as quickly become a risk for Nike. We need to see them keep that growth up if we're going to keep our confidence and if Nike's current run isn't them benefitting from a market desperate for a Santa rally. 

All the signs point to the positive. but we've got a long way to go here. We're really excited to see what they can keep pulling off. 

Rating: Overweight

Market Cap: $181B

P/E Ratio: 32x

Dividend Yield: 1.17%

Risk/Reward: Medium/Medium