Nike Expects Earnings and Stock Price Increase Upon Supply Chain Normalization

Profit Growth Driven by Increased Share of High-Profit DTC Channels
Nike "Vietnam Factory Operation, Production Expected to Normalize This Year"

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] Nike's stock price is on the rise following the announcement of solid third-quarter (December?February) results. Experts predict that as economic activities normalize, if supply chain normalization including transportation and production is achieved, both earnings and stock prices will trend upward.

On the 26th, Nike's stock price stood at $133.70. It rose 3.07% over the past five trading days, driven by the strong third-quarter performance announcement. Nike's third-quarter revenue was $10.9 billion, a 5% increase compared to the previous year. Pre-tax profit was $1.7 billion, exceeding market expectations by 22%. Revenue by brand was $10.3 billion for Nike and $570 million for Converse.

Notably, growth was seen in the highly profitable DTC segment. Online and direct store sales increased by 22% and 14% year-over-year, respectively, expanding the DTC (Direct to Consumer) channel's contribution to revenue from 40% in the same period last year to 44%. Online sales recorded double-digit growth in all regions except China, increasing its share of total sales by 3 percentage points year-over-year to 26%.

Pre-tax profit margin fell by 0.4 percentage points to 15.4%, affected by increased freight costs due to supply chain disruptions and a 13% year-over-year rise in selling and administrative expenses as marketing normalized. Inventory increased by 15%, largely due to rising in-transit inventory caused by supply chain disruptions despite strong demand.

Sales varied by region depending on reopening status. The U.S. region, accounting for 35.7% of total sales, posted $3.88 billion, up 8.9% year-over-year. Outdoor activities increased with the normalization of major cities, and store visitor numbers recovered to pre-COVID levels. The second-largest market, China, recorded $2.16 billion, down 5.2% year-over-year due to regional COVID-19 lockdowns.

Nike expects the sales decline in China to be within anticipated ranges and foresees future performance improvements as full-price sales and demand increase. Additionally, with all Vietnam factories currently fully operational, supply issues are expected to gradually ease with increased volume.

However, prolonged logistics disruptions are expected to cause a slight sales decline in North America in the fourth quarter. Ha-kyung Park, a researcher at Korea Investment & Securities, said, “In North America, transportation times have lengthened by two weeks compared to the same period last year and by more than six weeks compared to the average. Inventory at the end of the third quarter in North America increased by 22% year-over-year, with 65% of that inventory in transit.”

He added, “Although supply disruptions will inevitably impact North American performance and delay China's recovery in the fourth quarter, these issues are expected to be resolved in the medium to long term. Upon supply chain normalization, Nike's strong consumer loyalty and focus on high-margin channels position it for the highest potential profit improvement within the industry over the medium to long term.”

Consistent shareholder returns are expected to enhance Nike's investment appeal. Nike paid $480 million in quarterly dividends, a 12% increase year-over-year, and has executed $1.2 billion in share repurchases. Based on strong demand, Nike announced it will maintain full-price sales and price increase policies, projecting 4?6% revenue growth and a 1.5 percentage point improvement in operating margin this year.

Jung-ho Yoo, a researcher at KB Securities, explained, “Nike's 12-month forward return on equity and earnings per share have risen to 49.5% and $4.5, respectively. With improvements in sales and margins, free cash flow is also expected to increase.”

This content was produced with the assistance of AI translation services.