In the 19 quarters dating back to May 2017, Nike has only recorded two earnings misses, with one of those coming at the height of the pandemic.

During Monday’s earnings call, CFO Matthew Friend made it clear that while current results are promising, the future is governed by factors outside of the company’s control — namely market volatility, which looms large in the immediate future. 

Despite difficult geopolitical circumstances regarding China and an increasingly inflationary macro environment, Nike has managed to weather the storm.

The Swoosh beat analysts’ estimates across the board in Q3 2022, and North American sales were especially strong.

• $10.9 billion in Q3 revenues, up 5% YoY
• Nike Direct sales hit $4.6 billion, up 15%
• Nike Brand Digital sales increased 19% and 33% in North America
• Gross margin increased 100 basis points to 46.6%

On the call, Friend noted that the company could have exceeded its revenue print if it had enough merchandise on hand to meet demand. While the lost revenue opportunity is not necessarily something to celebrate, it points to an important maxim for the ongoing supply chain crisis: Inventory management can make or break a company. 

One of the main reasons that Peloton has struggled so mightily in recent months is inventory management. Overestimating the demand for connected fitness bikes led to the company to halt production on its core product. While Nike’s inventory did bloat during the quarter — up 15% YoY — the company still remained profitable.

Here’s how Nike was able to (just) do it.

The Hard Part: China and the Economy

It feels as though any conversation around earnings and corporate performance requires a huge red warning label — results may be impacted by inflation.

The most recent inflation report indicated a rate of 7.9%, the highest such figure in 40+ years. The current macro economic environment has set the stage for increased prices. Here’s an oversimplified breakdown of why consumer spending is one of the driving factors:

• High levels of inflation lead consumers to spend more now because their dollars lose value over time — making it beneficial to spend now.
• Increased spending from consumers incentivizes corporations to increase the prices of their goods and services to match the new level of spending from consumers. 

Per its Q2 earnings call, Nike is currently hiking prices to offset transportation, logistics, and air freight costs. 

The price increases are not only due to economic policy at home but also complexities overseas. The company is still navigating the difficulty of 2021’s Xinjiang controversy and potential sanctions from the U.S. on China should it choose to help Russia in the latter’s war on Ukraine. 

However, sales in the region are only down 8%, markedly better than the anticipated 12%. In an effort to quell some of the anti-Nike sentiment brought on by Chinese nationalism, Nike partnered with Top Sports and Pou Sheng to extend its reach in the region. Currently, about 20% of Nike Brands’ total revenue comes from its China operations. 

According to Evercore ISI analysts, Nike’s current quarter marks a turning point in China: “We think the strong performance eases key concerns that COVID significantly derailed China demand… We also think this puts to bed concerns that any shift in demand towards domestic brands would significantly hamper Nike’s growth.”

The Good Part: Women’s Sports

While the first three fiscal quarters of 2022 have been difficult for Nike’s share price, the company has made significant investments in some of the hottest markets in the industry. 

Nike only breaks out its specific women’s revenues in annual reports, but we can do a little math to back into a probable figure.

In fiscal 2021, women’s sales represented approximately 24% of Nike’s total wholesale equivalent revenues. If we use this percentage on the revenues for the nine months ending this March, we can assume roughly $7.9 billion in women’s sales for that period — more than all of 2020 and just $600 million away from full-year figures in 2021. 

Nike was also one of the lead investors in the WNBA’s recent investment round. The $75 million round was the largest ever for a women’s sports property and valued the company at $1 billion. The investment comes from a longstanding relationship with the league, as Nike has been its jersey sponsor since 2018.

The “sizable” investment is likely to pay off.

• Regular-season viewership increased 49% compared with the 2020 season and 24% compared to pre-pandemic 2019.
• The WNBA’s broadcast rights deals with ESPN and CBS come up for renewal in 2025, providing time for team valuations to grow prior to the league’s most important revenue increasing opportunity — a new broadcast deal. 

The company also established the Nike Athlete Think Tank — a permanent platform that maintains support for female athletes. The collective of 13 women is led by the likes of Venus Williams and Sabrina Ionescu.

In discussions with Nike, the group stressed the importance of financial support for women’s sports across the board. Nike wasted no time turning feedback into action, pledging $1.3 million to support organizations that reflect how each Athlete Think Tank member promotes a sense of belonging for women, girls and all adolescents — both on and off the playing field.

With women’s sports popularity on the rise, you can bet this is only the beginning of The Swoosh’s investment in the space.

The Futuristic Part: Digital and the Metaverse

Nike has invested heavily in its digital infrastructure since 2017, and the investment is beginning  to scale at an incredible level.

The company anticipates that by 2025, 60% of sales will come from DTC, and separately 50% of total sales will come directly from digital. Digital sales come largely from the SNKRS app. In Q1, CEO John Donahue reported that demand inside the app increased 130% during the quarter. 

• In Q2, SNKRS saw a 50% increase in sales — overtaking the Nike.com store for the first time.
• Overall, digital sales were up 19% for the quarter.
• In terms of total revenues, Nike now derives 26% of its total brand revenues from Nike Digital as a whole. 

Donahue hasn’t been shy about discussing Nike’s metaverse ambitions, either. In November, Nike announced NIKELAND — a virtual world for Roblox users to play games and purchase goods. 

Since its launch, Donahue says 6.7 million players from 224 countries have visited NIKELAND.

Nike has ambitions to build out a full product suite in the metaverse. The company plans on integrating both RTFKT Studios (the digital design company it acquired in December) and native digital studios it will create. The studios will allow Nike to transfer their world class Web2 products into Web3 products at massive scale.

Is Nike building a digital moat? The answer appears to be a resounding yes.

Margins on virtual goods are high — really high. Nike is betting that if consumers end up caring half as much about their digital avatars as they do their “IRL” selves, it will be well positioned to capture a lion’s share of the digital goods market. 

Wholly owned ecosystems where Nike can develop new digital products and experiences for customers are extremely valuable and, from this vantage point, Nike appears all-in.