Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Nike’s cautious outlook shows the consumer is hit by inflation
Peter Garnry
Chief Investment Strategist
Summary: Nike shares are down 6% on a weaker than estimated outlook for revenue growth suggesting just flat to slightly higher revenue in constant currency terms over the next year. The outlook also comes with a cautious outlook on China which has been a negative factor in the previous quarter. Costs are still impacted from logistics and commodities used in footwear and apparel production, and disrupted supply chains are pushing inventories higher because more goods are in-transit. Overall, Nike's result shows that the consumer is hurt by inflation and in China Covid lockdowns are making it difficult for consumer companies.
Nike hit by China and cost pressures
Despite shares have come down 37% from the peak back in November lowering expectations (see chart on forward valuation), Nike’s earnings outlook disappointed investors sending its shares down 6% in the main session. FY22 Q4 (ending 31 May) revenue was down 1% from a year ago led by weakness in its Greater China segment where revenue was down 20% and North America down 5% in constant currency terms. The bright spots were EMEA and NIKE Direct (its direct e-commerce channel) showing gains of 20% and 15% in constant currency terms respectively. Nike’s inventory was $8.4bn at the end of the quarter up 23% y/y driven by elevated in-transit inventories due to extended lead times from ongoing supply chain disruptions; the company says demand remains strong relative to inventory levels and thus the elevated inventory will likely not lead to major discounts going forward.
On the earnings call Nike said that it will likely see gross margin down by up to 50 basis points over the coming fiscal year ending 31 May 2023 and currency neutral revenue growth to be flat to slightly up. Given the inflationary pressures this translates into a slowdown in volume over the coming year. Nike also sounded cautious on China indicating that more lockdowns and disruptions cannot be ruled out. Overall, the outlook from Nike is further evidence of the consumer feeling the heat from inflation and today’s worse than expected consumer confidence and expectations indices together with another ugly regional Fed manufacturing activity index (Richmond Fed) have pulled US equities sharply lower.
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