[TOP STORY] Nike FY results ‘not a bad set overall’

‘I think maybe not only for this year, but maybe over the long term this is one that remains well positioned’: Victor Mupunga – Old Mutual senior research analyst.

SIMON BROWN: I’m chatting now with Victor Mupunga, Old Mutual senior research analyst. Victor, I appreciate the early morning time. We are talking Nike results. Full-year results for 2022 a bit of a mixed bag and certainly [there are] some challenges – supply chains, China lockdowns and the like. Considering the challenges and the mixed bag I thought not a bad set overall.

VICTOR MUPUNGA: Good morning, Simon, and thanks for having me. You’re right. You refer to a mixed set of results. I’d say it’s a messy set of results. [Simon chuckles] There are quite a number of one-offs in there. You’ve mentioned the factory closures, the hard lockdowns in China, supply chains. They also exited Russia. So yes, I think to get a good sense of how the business is performing you almost need to look at it from a per-geography or per-region perspective. But you’re right. I think from a headline perspective they managed to beat both revenue and earnings expectations, but there were a lot of nuances in those results.

SIMON BROWN: There were a lot of one-offs. If we look at the regions, what always strikes me, when we look at global companies based in America, and you look at comparable sales, like for like, the American growth is typically slow because it’s such a mature market. They grew by 7%. I know for South African CEOs 7% might not be a lot, but for North America that’s not a bad number.

VICTOR MUPUNGA: No, it’s not a bad number at all. If you actually extend that a little bit to the compound annual growth rate over the last three years for North America, it’s been 7.5% or so. So that’s kind of smoothed out all of the sort of Covid interruptions and the like, and that’s a very good number. That remains their biggest market. They generate about 40% or so revenue from that market, so to grow at that rate in a developed market such as that I think is a very good growth rate.

They also experienced a similar growth rate in the near-Asia Pacific over the years. So I think there were no concerns about all of those other regions, and the real question during this reporting period was around China – how they performed there.

SIMON BROWN: Yes. China was about 12% of revenue and did decline. Much of that, I suppose, can be attributed to hard lockdowns. China has been only just recently opening up some of the cities after going back into hard lockdowns in April.

VICTOR MUPUNGA: Yes. I think just to get a good sense of how important China is for them, you mentioned that it was 12% of sales this year; but prior to that it was 20% of sales before the decline. That’s actually more from a profit perspective, because this is a high-margin market for them. I think in the seven or eight years leading up to this year they’d enjoyed double-digit revenue growth in that market. So it’s very important for the Nike investment case.

But as you rightly point out, most of that, not all of it, is because of the hard lockdown that we’ve seen there over the last few months. Judging from what we’ve seen in other markets, when they reopen after Covid, I would expect that market to come right. Obviously it doesn’t happen immediately because they’re now sitting with quite a bit of inventory in there because they’re not able to sell, etc. So it would take at least a quarter for them to trade themselves out of that excess inventory that they have, but towards the latter part of the year we’d expect that to come right.

SIMON BROWN: They’ve also been doing fairly well in digital. They were fairly early to it and they do weird stuff. I remember they did the Nike FuelBand, which was one of the first sort of health trackers, a decade or more [ago]. It’s fallen by the wayside, but they do fairly well on digital, which in one sense is weird because it’s shoes. But I suppose if you know that you’re a size whatever you can buy quite comfortably from their app.

VICTOR MUPUNGA: You’re right. Nike is not one of those businesses that most people think of as being very strong from a digital perspective. But if you look at their sales pre-pandemic, they generated 10% of sales from digital. Now that’s jumped up to 25% now. And when you add in another 15% for their direct-to-consumer channel, which is their own Nike-branded store, they’re sitting with about 40% of their sales directly to consumers to reach positive impact on margins …… If they’re not selling via wholesale they’re able to realise full prices. They also get a better connection with the end consumer in a way that they typically don’t get when they’re selling through other retailers.

So that part of their business has continued to do very well, and that grew by 18% over the year. Over time the lifetime value of a consumer who purchases directly via the digital channels or the Nike-branded stores, according to management that consumer is worth three times more than the average consumer. So it’s important to keep a close eye on that part of the business, because it remains very important for them.

SIMON BROWN: That is a chunky number and I take your point. It’s a much better relationship.

A quick last question. Supply chains should start to improve, China perhaps moving away from harder lockdowns. We’ve got a Soccer World Cup coming later this year. That’ll always be good for them. The stock to my sense in the year ahead is looking perhaps less challenging and better from a revenue and a margin perspective.

VICTOR MUPUNGA: Well, certainly from a revenue perspective. I think the expectation is that they’ll grow by about low double digits. That’s from a revenue perspective, that’s consensus numbers. But there are still quite a number of headwinds from a margin perspective.

The interesting metric to watch is freight cost. Over the last two years their freight cost for shipping containers from Asia to North America has gone up by five times in the last two years, and that’s quite a headwind. But to offset that they’ve a number of levers that they’re able to pull, and it’ll be an interesting balance to make sure that they pull those levers to offset some of those supply constraints.

So I think maybe not only for this year, but maybe over the long term this is one that remains well positioned.

SIMON BROWN: Well positioned. We’ll leave that there. Victor Mupunga, Old Mutual senior research analyst, I appreciate the early morning.

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