Nike's Business Continues To Grow Despite War, Inflation, And A Broken Global Supply Chain

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Hey Friends,

Nike reported its fiscal third-quarter results after the bell yesterday, and the results were much better than analysts expected. They beat on both the top and bottom line, and shares were up over 5% after hours.

Sales came in at $10.87 billion for the quarter, up 5% from $10.36 billion a year earlier, and beating analysts’ expectations for $10.61 billion. Gross profit ($5.06 billion) and gross margins (46.6%) surprised to the upside, and digital continues to become a more significant part of Nike’s overall business, albeit missing analysts’ estimates this quarter.

Nike’s Q3 Revenue (2010-2022)

• 2010: $4.7 billion

• 2011: $5.1 billion

• 2012: $5.7 billion

• 2013: $6.2 billion

• 2014: $7 billion

• 2015: $7.5 billion

• 2016: $8 billion

• 2017: $8.4 billion

• 2018: $9 billion

• 2019: $9.6 billion

• 2020: $10.1 billion

• 2021: $10.4 billion

• 2022: $10.9 billion

“We are focused on what we can control,” said Nike CFO Matthew Friend, on yesterday’s post-earnings conference call. “There are several new dynamics creating higher levels of volatility.”

Nike’s Q3 2022 Actuals vs. Consensus

That “higher level of volatility” has made Nike’s stock act like a yo-yo for the last several months. Investors watched the share price crash over 35% when the pandemic began, but the stock preceded to nearly triple over the preceding 5-months.

It has since fallen about 25% from its all-time high in November 2021. But still, the stock is up over 6% in pre-market trading today, and Nike’s long-term investors are up more than 130% over the last 5-years — that's compared to 90% for the S&P 500.

The truth is that it’s been an extremely challenging few months for Nike. Sure, the business saw outsized benefits as governments around the world printed trillions of dollars and told people to stay at home during COVID-19, timing up perfectly with Nike’s shift to digital and enabling them to increase sales.

But the company faces an entirely new set of challenges today. The United States just released a 7.9% monthly inflation print. That’s a number we haven’t seen in 40+ years, and if you used the pre-1980 methodology, consumer price inflation in the United States would be nearly 20% today.

That’s obviously a problem for the 45% of Americans who own no investable assets and are watching their real wages decline while gasoline, food, transportation, and shelter increase disproportionately. But it also presents a unique set of challenges for businesses like Nike.

Many people are complaining about corporate price gouging. I think it’s probably naive to say for sure that none of that is happening (there are 40 million businesses in the US!), but here’s the other way to look at it — Nike has an obligation to its shareholders to maintain margins and profitability in the face of increasing costs for raw materials, manufacturing, and overhead.

Now add in the fact that Russia has decided to invade Ukraine, and the situation gets even messier. That invasion has prompted the Western world to unilaterally cut Russia off from the global financial system, and thousands of companies, including Nike, have pulled their business out of the region to show support.

This isn’t a massive revenue-killer for Nike—only 2% of their sales currently come from Russia—but it does add complexity to the situation. For example, Moscow has asked Beijing for assistance in its war with Ukraine, and the United States has reportedly threatened to impose consequences on China if they agree to that request.

A move like that would impact Nike to a much greater degree. Roughly 20% of its business comes from Greater China, and they are still attempting to recover from the Xinjiang controversy/boycott in 2021.

Nike’s Revenue In Greater China (2015-2021)

• 2015: $3.1 billion

• 2016: $3.8 billion

• 2017: $4.2 billion

• 2018: $5.1 billion

• 2019: $6.2 billion

• 2020: $6.7 billion

• 2021: $8.3 billion

We all know that Nike has done an incredible job transforming its business over the last few years. They have eloquently gone from a wholesale model to more of a centralized distribution model that is digitally driven.

But geopolitical uncertainty around our relationship with China is a problem. That represents Nike's highest-potential growth area, and my guess is that investors are waiting on the sideline to see how this plays out.

I hope everyone has a great day. I’ll talk to you tomorrow.

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