Nike’s quick Rebound could lead to Sprains

While there is much to be excited about, keeping up with a soaring valuation could prove difficult

By guest author Jinjoo Lee from Wall Street Journal

Caption and Graphic courtesy by Wall Street Journal

Nike has made an impressive rebound.

The apparel brand’s revenue was roughly flat in the quarter ended Aug. 31 from a year earlier—a solid performance compared with the 14.4% decline analysts were expecting. In the preceding quarter, Nike sales had plummeted 38% despite the company’s proven ability to sell online.

It probably helped that some major sporting events resumed last quarter, including Major League Baseball and U.S. professional basketball, helping drive interest in athletic gear and apparel. The company also kept launching new products, including its first dedicated maternity collection and a new yoga line, both of which were well-received. Sale of women’s apparel, Nike’s strategic focus, grew at a higher pace than men’s, the company said on Tuesday’s earnings call after the market close.

Sales were strong globally. China as well as Europe, the Middle East and Africa stood out, with revenue growing by 6 % and 5 %, respectively, compared with a year earlier. In North America, where revenue was hit hard during the peak pandemic months, sales had mostly recovered and were down by just 2 %.

The good news for Nike is that digital sales continued to grow last quarter at 82% year over year—a higher pace compared with the preceding quarter—despite stores reopening. Digital sales earn higher margins.

Meanwhile, operating costs were 11 % lower than a year earlier as Nike spent much less on marketing and athlete endorsements, or what it calls “demand creation” expenses. Inventories, which were too high, also improved, though they were still up 15 % year over year. They are expected to return to prior-year levels in the next 60 days.

Like Lululemon, another star performer in the apparel world, Nike is in a better position than competitors that lacked the balance sheet to be able to continue investing in new products. But the secret is out: Nike shares were up 13 % in after-hours trading, which would place them roughly 30 % higher year to date. Even before that leap, its shares were valued at 42 times forward earnings, well above its five-year average of 28 times. At those levels, merely keeping up with expectations would not be enough to maintain investor enthusiasm. Lululemon provides a cautionary tale: Its shares were up year to date as much as 72% in early September but have since given up roughly half of that gain even after beating analyst estimates.

Sprinting too quickly can lead to some sprains down the line.