What's Happening: Nike Reports Record Revenue But The Stock Continues To Drop

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(Photo: Fortune Magazine via Getty Images)

Hey Friends,

Nike is one of those consumer businesses that has been hit with virtually every problem over the last few years—supply chain disruption, four-decade high inflation, labor shortages, COVID-19 store closures, increasing global competition, and more.

“We’re still paying about 5x the rate that we paid pre-pandemic to put product in a container on a boat and move it from Asia to the US,” says Nike CFO Matt Friend.

And shipping transit times are still two weeks longer than they were pre-pandemic.

Still, the business reported stronger than expected earnings earlier this week. They posted $46.7 billion in 2022 revenue, up 5% year-over-year. Their gross margins actually increased 120 basis points to 46%, and Jordan Brand crossed $5 billion in revenue for the first time ever—that’s a massive 31% jump year-over-year.

Nike’s 2022 Income Statement Review (Nike News Release) 

• 2022 Revenue: $46.7 billion (+5% year over year) 

  • Nike Brand: $44.4 billion (+5% year over year) 

    • Nike Direct: $18.7 billion (+14% year over year) 

      • Nike Brand Digital: +18% year over year 

      • Nike-owned Stores: +10% year over year 

  • Converse: $2.3 billion (+6% year over year ) 

• 2022 Net Income: $6 billion (+6% year over year) 

• 2022 Gross Margins: Up 120 basis points to 46% 

• 2022 Diluted Earnings Per Share: $3.75 (+5% year over year)

But that doesn’t mean everything is going well. Nike is entering a difficult position—with a looming recession, high gas prices, an overheated real estate market, and more, will consumers tighten their discretionary budget? Or opt for cheaper alternatives?

Well, it appears investors might already be expecting that. Nike’s equity has gotten crushed over the last few months and is down more than 40% from its 52-week high—compared to the S&P 500, which is down just over 20% from its 52-week high.

Now some of those concerns are certainly valid. A high-end consumer sportswear, equipment, and footwear manufacturing company isn’t exactly recession-proof. And Nike is still dealing with elevated freight costs, increased product costs, supply chain investments, higher levels of markdowns, and factory shutdowns in China & Vietnam.

Joe Pompliano @JoePompliano

Interesting stat from Nike earnings: It’s currently taking Nike about 80 days to move product from Asia to North America, or about twice as long as it took pre-pandemic. Global supply chain congestion continues to hurt their business.

But I still think Nike is emerging from the pandemic in a better spot than it entered.

They have spent the last few years completely rebuilding their business. They cut ties with thousands of retailers in 2020 and shifted to an end-to-end ownership model.

So rather than selling inventory through department stores & wholesale outlets, like before, Nike has built smaller stores called "Nike Live," which serve as pickup hubs for online orders, and multi-level flagship stores called "House(s) of Innovation.”

This approach might limit distribution in the short term, but it offers tangible benefits in the long term. For example, Nike earns 10% higher margins on digital sales, and a customer that connects with the business on more than two digital platforms has a lifetime value that is four times higher than those that don’t.

But here’s the most interesting part: the plan is working. Nike did less than 15% of its business through digital channels before the pandemic started. But digital accounted for nearly 25% of sales last quarter, and Nike is now on pace to have digital sales represent 40% of its business within the next three to four years.

This is all possible because Nike spent years building digital apps—Nike app, SNKRS app, Nike Training Club, and Nike Running Club—that now serves as the mobile hub for 300 million members. And sure, the timing has certainly accelerated things :)

While Nike’s digital transformation appears to be in full swing, it feels like people are having a difficult time zooming out and looking at the company’s long-term trend.

For example, the supply chain is a mess, and sales in Greater China fell nearly 20% last quarter with COVID lockdowns reemerging. But Nike still has more than $13 billion in cash on its balance sheet and is coming off a record year—despite all the challenges.

Nike Cash & Short Term Investments

• 2018: $5.24 billion

• 2019: $4.66 billion

• 2020: $8.78 billion

• 2021: $13.47 billion

So we’ll see what happens. Shifting the focus of a business is never easy, and my guess is that it is exponentially more difficult when you have 75,000 global employees and a $160 billion market cap. But Nike is run by some fantastic operators that appear to be navigating several challenges quite well, and I certainly wouldn’t bet against them.

As always, none of this commentary is investment advice. I don’t own any shares of Nike stock, and I don’t care what you do with your money. Do the work & decide for yourself.

Have a great day. I’ll talk to everyone tomorrow.

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