On September 23, the clothing giant Nike (NKE: NYSE) published financial results for the first fiscal quarter of 2022. The company's sales for the reporting period fell short of Wall Street forecasts, which casts doubt on the impact of supply chain disruptions on the issuer's short-term revenue estimates. At the same time, Nike Inc.' s profit exceeded the consensus. In particular, the EPS for June-August was $1.16, which is 22.1% higher than last year, and also better than the consensus forecast of $1.11. Revenue increased by 16%, reaching $12.2 billion and falling short of analysts ' estimates of $12.465 billion.
Sales in China increased by 11% compared to last year, to $1.982 billion, which is the worst result in geographical terms. Previously, this region was one of the most important sources of income for Nike. Sales in North America, the company's largest market, rose 15% to $4.879 billion, falling short of the projected $5.079 billion.
The gross profit margin increased by 170 basis points, to 46.5%, due to an increase in the margin in the direction of Nike Direct (direct sales to customers), higher sales volume at full price and favorable changes in foreign exchange rates. Digital sales of the Nike brand increased by 29% year-on-year. The retailer invests in its own website and a set of mobile applications. The development of this direction was especially rapid during the quarantine restrictions, when many customers decided to shop without leaving home.
However, the issuer has faced certain difficulties that may affect its performance in the future. Since mid-July, the company has been working with partially closed factories in Vietnam, where it produces about 50% of shoes and 30% of clothing. Nike reported that it ended the last quarter with inventories of $6.7 billion, which is almost the same as the previous year and slightly lower compared to the last quarter ($6.9 billion). The company said that its stocks are now on the way to warehouses, and the deadlines for completing orders have increased due to disruptions in supply chains.
The development of digital channels is a long-term driver of business growth and reflects the traditional innovation that has always distinguished Nike among competitors. The success in the " figure" allowed the CEO to raise the goal for the share of online sales to an ambitious 50% by 2023. Previously, this figure was 30%. The CEO of the company has experience in carrying out digital transformations, so Nike may well succeed in the e-commerce market, and the pandemic has only become a catalyst for the process, changing people's habits.
Nike's reporting for the first quarter showed that problems in the supply chains have already begun to affect the financial results, despite very strong sales in the previous period. Although economic activity is gradually recovering after the lifting of restrictions, the demand for sporting goods remains at a very high level. However, in the countries of Southeast Asia, the epidemic situation is worse than in other regions. As a result, quarantine restrictions at factories in Vietnam lead to an increase in the delivery time of goods. Thus, Nike does not have time to fully meet the increased demand for its products, which leads to a shortage of revenue.
However, Nike's favorable profit indicators demonstrate that the direct sales channel to customers is actively developing and gives a significant margin increase. In our opinion, the difficult situation in the supply chains will continue in the second fiscal quarter, but strong demand and growth in direct and digital sales will allow the company to maintain the company's marginality at a high level. At the same time, the decline in growth rates in Greater China is of concern.
Taking into account all the above factors, we leave our long-term target price for Nike securities unchanged, but we expect a slowdown in the growth of quotations in the next quarter. The target for the NKE stock is $170.