Nike
Inside the Numbers
In Q1, the company reported earnings per share of $1.16, beating consensus expectations of $1.11. It was a 22% increase from last year's Q1 EPS. Revenue was $12.25 billion, a 15% increase from last year, but slightly less than expectations of $12.46 billion.
The company said a variety of supply chain issues like longer transit times, labor shortages, and prolonged production shutdowns in parts of Asia were hampering its abilities to keep inventories fully stocked.
As a result, the company sees sales flat to down in its next quarter, while analysts had been looking for 12% growth in Q2. Nike produces about 50% of footwear and 30% of shoes in Vietnam which has been dealing with factory shutdowns as governments look to curb the spread of the Covid-19 virus. So far, the company has lost about 10 weeks of production. On top of this, it is also dealing with shipping delays with transit taking twice as long and costing more.
One silver lining is that Nike's digital sales grew by 29% which is continuing a positive trend for the company, and the company remains on track for digital to account for 40% of revenue by 2025. Another positive of current circumstances is that the inventory shortage is leading to increased pricing power and fewer discounts.
However, one upside to tightened inventories has been greater profitability on the products that Nike sells, since the company has little incentive to discount. Nike has also been reducing its reliance on wholesale partners that often sell at a markdown.
Stock Price Outlook
Nike is one of the strongest brands in the world. Buying its stock on weakness has always been rewarded. Currently, it's down 15% from its highs a few weeks ago.
Although, shares could weaken more in the short-term, it likely has more upside given that the market remains in a bull market. Further, Nike's issues remain more related to near-term, transitory issues while demand continues to grow. In fact, a more bullish interpretation of the current developments is that Nike's margins have sharply risen with more pricing power and digital sales.