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Nike Inc. (NKE - Free Report) is slated to release first-quarter fiscal 2023 results on Sep 29. The leading sports apparel retailer is likely to have witnessed top-line growth in the fiscal first quarter, while earnings per share are expected to have declined year over year. The company continues to gain from its Consumer Direct Acceleration strategy, along with strong demand, compelling products, and robust performance in its digital and DTC businesses. Supply-chain constraints continued weakness in Greater China, and higher costs have been weighing on its performance.

The Zacks Consensus Estimate for fiscal first-quarter revenues is pegged at $12.3 billion, suggesting 0.7% growth from the prior-year quarter’s reported figure. The Zacks Consensus Estimate for the company’s fiscal first-quarter earnings is pegged at 93 cents per share, suggesting a decline of 19.8% from the year-ago reported number. Earnings estimates for the fiscal first quarter have been unchanged in the past 30 days.

We expect the company’s fiscal first-quarter total revenues to increase 1.2% year over year to $12,397.4 million and the bottom line to decline 22.2% to 90 cents per share.

In the last reported quarter, the company delivered an earnings surprise of 11.1%. Its bottom line beat the consensus estimate by 16.4%, on average, over the trailing four quarters.
 

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Key Factors to Note

Nike is expected to have witnessed continued strong demand for its products, robust performance in its digital and DTC businesses, and product innovation in first-quarter fiscal 2023. Gains from its Consumer Direct Acceleration strategy are also expected to have been tailwinds.

On the last reported quarter’s earnings call, the company stated that it remains confident of its performance in first-quarter fiscal 2023, driven by brand strength, consumer connections, product pipeline, and normalizing of inventory supply in North America, EMEA, and APLA. For first-quarter fiscal 2023, the company predicted real dollar revenue growth to be flat to up slightly.

The Nike Direct business has been benefiting from robust growth across regions and strength in Nike Digital, courtesy of strong demand across its app ecosystem. Revenues at Nike-owned stores are expected to have gained from improved traffic and higher conversion rates. On its last reported quarter’s earnings call, management noted that traffic trends began to move toward the pre-pandemic levels.

Additionally, improved Nike Direct margins, driven by lower markdowns and a higher full-price sales mix, have been aiding the gross margin, even though the headwinds related to escalated freight and logistic costs have persisted.

However, Nike’s first-quarter fiscal 2023 revenues are likely to have been impacted by weakness in Greater China due to the COVID-19 wave and rising costs to support brand and digital investments. The company has been witnessing soft revenues in China for the past few quarters, owing to the resurgence of COVID-19 and the ongoing supply-chain disruptions. On the last reported quarter’s earnings call, management remained cautious about its performance in Greater China due to the uncertainty around additional COVID-19 disruptions.

We expect fiscal first-quarter revenues for the Greater China region to decline 17.8% year over year to $1,628 million.

NKE has been witnessing a decline in gross margin due to higher inventory obsolescence reserves in Greater China and increased freight and logistics costs. On the last reported quarter’s earnings call, management predicted more than a 100-bps decline in the gross margin for the fiscal first quarter, owing to efforts to streamline supply and demand in Greater China. Moreover, increased higher promotional activity to sell seasonal inventory, which arrived late due to a combination of factory closures and longer transit times, is likely to hurt the gross margin.

The return of sports activities and events has been leading to elevated selling and administrative (SG&A) expenses for NKE, driven by an increase in operating overhead and demand-creating expenses. Increased sports marketing expenses and sustained investments in digital marketing to support elevated digital demand have been resulting in higher demand-creating expenses. Further, higher wage-related expenses and Nike Direct variable costs, as well as increased technology investments to support digital transformation, have been causing increased operating overhead costs.

We expect the gross margin for the fiscal first quarter to decline 100 bps to 45.5%, which is in sync with the company’s forecast. Our estimate indicates a 10.1% year-over-year increase in SG&A expense for the fiscal first quarter, with the SG&A expense rate increasing by 250 bps. Operating overhead and demand-creating expenses, as a percentage of sales, are expected to increase 180 bps and 70 bps, respectively, in the fiscal first quarter.

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