Nike's Self-Confidence Remains Intact Despite A Rare Revenue Miss

On Thursday, Nike Inc (NYSE:NKE) reported fiscal first-quarter revenue that missed Wall Street’s revenue expectations for the first time in two years while beating earnings and gross margin expectations. Although it continues to pursue its DTC strategy, Nike reestablished its wholesale partnerships with Macy’s Inc (NYSE:M) and Designer Brands Inc (NYSE:DBI) to clear excess inventories while stating it is in the process of resetting its business with Foot Locker Inc (NYSE:FL).

Also this week, Nike rival Lululemon Athletica Inc (NASDAQ:LULU) teamed up with its former foe Peloton Interactive Inc (NASDAQ:PTON) in a five-year strategic global partnership as both companies seemed to have realized that efforts outside of their core competencies were not bringing results.

Nike’s Fiscal First Quarter Highlights

For the quarter that ended on August 31st, Nike made a net income of $1.45 billion, or 94 cents per share, compared to $1.47 billion, or 93 cents per share, it earned a year earlier while topping the consensus estimate of 75 cents from a survey of analysts that LSEG gathered. Revenue rose about 2% YoY to $12.94 billion, coming in below LSEG’s consensus estimate of $12.98 billion. Footwear sales made about 68% of revenue as they rose 4% to $8.4 billion while apparel sales contracted 1% as they amounted to $3.4 billion.

Due to higher product costs and currency exchange rates, Nike’s gross margin fell about 0.1 percentage points to 44.2%, but it was higher than StreetAccount’s expectation of 43.7%. But those trends were offset by price increases which contributed to the earnings beat. Inventories fell 10% to $8.7 billion.

Sales By Region

Besides North America, sales rose across regions. All eyes were upon Nike’s recovery in China with sales growing by 5% YoY to $1.7 billion, but falling short of StreetAccount’s $1.8 billion expectation as the region’s economic recovery is somewhat of a mixed bag. But North America remains the largest market in revenue and its sales contracted 2% YoY to $5.42 billion, slightly topping StreetAccount’s expectations of $5.39 billion.

The EMEA region enjoyed an 8% rise as sales amounted to $3.61 billion, topping estimates of $3.51 billion while Latin America and Asia Pacific came slightly below StreetAccount’s estimate of $1.59 billion as sales amounted to $1.57 billion, rising 2%.

Converse Fell Short But DTC Continued To Fuel Growth

For the second quarter in a row, Converse disappointed as sales dropped 9% YoY to $588 million, coming in far below StreetAccount’s expectation of $660 million.

However, the DTC channel which includes both Nike-owned digital stores and its own digital channel continued to flourish as it rose 6% YoY.

Nike Maintained Its Full Year Guidance

For the full year, revenue is still guided to grow in the mid-single digits with gross margin expanding from 1.4 to 1.6 percentage points.

The Agreement Between Lululemon And Peloton

Industry Headwinds Remain

What’s concerning for Nike, Lululemon and Peloton is that persistently high inflation is forcing consumers to pull back on apparel and footwear. There’s also the additional headwind of student loan payments that are set to resume in October. But despite the macroeconomic challenges and its North America slowdown, Nike remains as confident as ever.

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Nike’s Fiscal First Quarter Highlights

Sales By Region

Converse Fell Short But DTC Continued To Fuel Growth

For the second quarter in a row, Converse disappointed as sales dropped 9% YoY to $588 million, coming in far below StreetAccount’s expectation of $660 million.

However, the DTC channel which includes both Nike-owned digital stores and its own digital channel continued to flourish as it rose 6% YoY.

Nike Maintained Its Full Year Guidance

For the full year, revenue is still guided to grow in the mid-single digits with gross margin expanding from 1.4 to 1.6 percentage points.

The Agreement Between Lululemon And Peloton

Under the five-year agreement, Lululemon will be ditching its failed Mirror fitness device who was deemed as too complex and expensive by consumers and also stop producing its Peloton like fitness classes, while Peloton will be reducing the production of its private fitness clothing label that seemed to have lacked luster and also sparked a lawsuit from Lululemon who accused Peloton of copying its products, with the two sides settling last year. Over the next few months, Peloton streaming classes will be available in the Lululemon app. Although both brands will benefit from creating this experience for their consumers, Peloton arguably needs this partnership more than Lululemon considering its financials are standing on shaky grounds.