Nike (NKE) reported mixed fourth quarter results. The athletic apparel giant reported adjusted earnings of $1.01 per share compared to the $0.85 estimate. However, revenue of $12.61 billion fell short of the $12.86 billion estimate.

Morningstar senior equity analyst David Swartz thinks it was the revenue miss that sent shares lower in after-hours trading. The company reported slightly better-than-expected revenue numbers in China. Swartz thinks "the China numbers are still pretty low compared to what Nike should be doing and can do in China," adding that its sales recovery in the country is likely taking longer than many had hoped.

On what could cause Nike to reignite sales growth, Swartz thinks new products will help, but that the impact likely won't be felt until late into fiscal 2025.

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This post was written by Stephanie Mikulich.

Video Transcript

But we want to break down these results that are crossing the wire again, beating estimates on earnings per share of revenue coming in light of estimates.

And here to dive a little bit deeper into this print is David for senior equity analyst at Morningstar Research.

David.

Thank you so much for joining the program.

What sticks out to you here?

It seems like we got a bit of a mixed bag but shares are down more than five, right, right, around 5%.

Yeah, I think the sales number is is pretty weak down 2%.

So I was looking for a 1% sales growth number for the quarter.

So the sales were light, I think that's probably the the main concern.

As you mentioned, the EPS was above estimates.

Uh I was at uh 88 cents and, and 90 reported 99 cents.

That's really been common though Nike has consistently uh beaten EPS estimates in recent quarters.

So probably people expected that although some analysts have lowered their EPS numbers, it looks like mainly that the performance was due to lower operating costs.

Are you surprised by these, these uh the greater China numbers, David, it looks like 1.86 billion that does just beat the estimates 1.83 billion.

What, what are the puts and takes in that market for Nike?

I think that the China numbers are still pretty low compared to what Nike should be doing and and can do in China.

Um You know, I think Nike can get back to double digit sales growth in China.

We haven't seen that recently.

Um So I think that people are still concerned that Nike uh is still not really performing that well in China.

Now, Nike just opened up a big house of flight store in Beijing.

Uh Nike's been doing a huge amount of marketing in China, so it's certainly a big focus to the company, but it does seem that Nike's um recovery there is taking a little bit longer than people probably hoped.

So, David, how can Nike re reignite and reinvigorate this sales group?

Does it all come down to that product innovation?

That's certainly a big part of it.

Uh We do have a lot of Nike products coming out later this year.

Nike held a big marketing event in Paris recently ahead of the Olympics.

Nike will be releasing a lot of products around the Olympics.

They also be doing a lot of marketing and also a lot of new products in the following winter seasons.

Most likely we won't see a big impact on sales from the new products until fiscal 2025 probably late in the year, uh late in the fiscal year.

So, um, that's probably a bit of a concern for investors that it could be a, another couple of quarters before Nike sort of gets back to sales quote.

And, and David, what, what is in the, in talking about the product innovation, what's in the pipeline here that we know about that you think is gonna excite consumers and investors.

Well, Nike has a lot of new running shoes out, new technologies, you know, new versions of air and, and its other main products.

Um We'll have to see exactly, you know whether any of them are big enough to drive sales.

It has been some years since um Nike put out uh vapor Max and, and other top selling products.

Uh We have, I haven't seen necessarily things recently that were too innovative in the sense that they drew customers away from competitors and we have seen competitors like on especially um that have, have probably taken some share from Nike.

Um So we'll have to see uh but definitely Nike is investing heavily in, in new shoe technology.

And how do you think the economic environment is playing into this when you think about discretionary spending, high inflation?

Is that something that you're seeing impact, not only Nike, but a lot of these competitor brands as well?

Yeah, definitely, you know, the sportswear market right now is pretty uneven most of the companies in this industry have said that including Puma Adidas Under Armour and others.

Uh Now we have seen some that have performed well.

Uh certainly, you know, dick sporting goods, for example, in the US has been doing fine.

Um Some other sporting goods stores haven't been doing quite as well.

Um So we we have seen kind of a mixed bag uh from both the manufacturers and retailers of athletic products.

But generally, I have to say that the economic conditions are not not entirely favorable.

We have seen a shift in spending and I think towards travel in a way from consumer goods and apparel and footwear specifically.

And we should know here, David that there is a statement by, by execs two here CFO talked about how their fourth quarter results highlighted challenges.

He says that have led us to update our fiscal 25 outlook.

Um I'm just trying to think about, you know, potential catalysts ahead, David.

You know, some folks point to the Olympics, of course, is that a potential tailwind for Nike, the Olympics itself probably does not generate a lot of significant sales for Nike more than it would normally do.

Uh but it is a marketing opportunity.

Um And Nike also will benefit from other major sporting events including the Euro Cup, which is currently going on right now.

Um But you know, it does provide Nike with a more stable uh product development site cycle.

The last Olympic cycle was really messed up because of course, the Olympics were delayed by a year in summer Olympics and then there were no fans in the stands and it really did not work out, uh you know, as normal.

So, uh I think that Nike is excited to be back towards a normal uh athletic cycle and that does affect Nike's product cycle and its marketing plans.

Earnings call is right around the corner here.

What do you want to hear from management when it comes to this report?

Is there, is there anything management could say to alleviate some of the investor concern that we're seeing play out in the stock price right now?

Yeah, definitely the gross margin is not up to where it should be.

And and Nike had told us that gross margins would start to recover.

So that's something that will, that will definitely come up on the call.

I also think that we'll hear some commentary about the sales outlook and the major uh regions, North America, Western Europe and China.

Um and we'll see, you know what they say about when those markets may be getting back to stronger numbers.

Uh Certainly, uh you know, in terms of China's giving back to probably double the sales growth.

And in Western Europe and North America, it's, it's back to positive, you know, sales growth and maybe the mid single digits.

Um So we'll have to see if we get any guidance from Nike about how many quarters it may be before we start to see numbers like that.

David always appreciate your rapid fire response and reaction to these reports.

Thanks for joining us.

Thank you.