Nike (NKE) Q3 earnings 2023

Nike easily beat Wall Street’s expectations for its holiday quarter earnings and revenue, though its bloated inventory continued to weigh on its margins and China sales fell short of expectations.

Nike, like other retailers, has been in the process of offloading a glut of inventory brought on by supply chain disruptions and shifting consumer demands that’s been weighing on its margins.

Gross margins were down to 43.3% for the quarter, a decrease of 3.3 percentage points, due to higher markdowns and promotions its used to liquidate its inventory.

While Nike CEO John Donahoe told investors last quarter he believes the company is past its inventory peak, the company warned gross margins were expected to take a hit during the holiday quarter.

Inventories were up 16% compared with the year ago period at $8.9 billion, which the company attributed to higher product input costs and elevated freight expenses.

Here’s how the sneaker giant performed in its third fiscal quarter of 2023 compared with what Wall Street was anticipating, based on a survey of analysts by Refinitiv:

• Earnings per share: 79 cents vs. 55 cents expected
• Revenue: $12.39 billion vs. $11.47 billion expected

The company’s reported net income for the three-month period that ended Feb. 28 was $1.2 billion, or 79 cents per share, compared with $1.4 billion, or 87 cents per share, a year earlier.

Sales rose to $12.39 billion, up 14% from $10.87 billion a year earlier.

Nike has been looking to see a sales rebound in China, its third-biggest market by revenue, as the region recovers from the Covid pandemic. But those hopes failed to materialize. Sales were down 8% in the region during the third quarter to $1.99 billion, despite the end of the country’s zero-Covid policy that had weighed on operations.

Wall Street analysts had anticipated sales in the region of $2.09 billion, according to StreetAccount estimates.

Sales in China have been soft as consumers contended with sweeping lockdowns and rising infections. While some activity has begun to pick up, consumers aren’t back to pre-pandemic shopping levels just yet, according to a Citi research note.

Outside China, Nike saw double-digit sales increases in all of its other markets. Sales in North America were up 27% and in Europe, Middle East and Africa, revenue jumped 17% compared with the year-ago period. In Asia Pacific and Latin America, sales were up 10%.

For the last several years, Nike has been working to build out its direct-to-consumer sales and has invested heavily in the channel by building out experiential stores, developing its loyalty program and growing its e-commerce sales.

The investments into its DTC channel has come at a cost, but sales have continued to grow. Nike Direct sales were up 17% during the holiday quarter to $5.3 billion and Nike digital sales jumped 20%.

Selling and administrative expenses were up 15% to $4 billion, the bulk of which was related to wage-related expenses and Nike Direct costs.

As part of its efforts to focus on DTC, Nike has ties with a host of wholesalers, and over the last two quarters has relied on those partnerships to offload inventory. Wholesale revenues were up 12% in the quarter, following 19% growth during the previous quarter.

On Monday, Foot Locker CEO Mary Dillon touted a “renewed” and revitalized relationship with Nike, its biggest brand partner.