Published - March 22, 2023 @ 3:48 PM (EET)

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Footwear and apparel maker Nike Inc. (NYSE:NKE) beat revenue and profit expectations on double-digit sales gains for its holiday quarter earnings, even though its bloated inventory continued to weigh on its margins and sales in China fell short of estimates.

Releasing its financial results Tuesday from the third quarter of fiscal 2023, Nike saw a revenue jump of about 14% year-over-year to $12.39 billion, above analysts' average estimate of $11.5 billion. Meanwhile, gross margin was 43.3%, below expectations of 43.7%.

In prepared remarks published by Nike, CFO Matthew Friend, said the company "drove strong holiday sales with momentum continuing into the new calendar year" in North America, where quarterly revenue climbed 27%.

WHY IT MATTERS

Like other retailers, Nike has been in the process of offloading a glut of inventory due to supply chain disruptions and shifting consumer demands that's been weighing on its margins.

Compared with the year-ago period, inventories were up 16% at $8.9 billion, which the company attributed to higher product input costs and elevated freight expenses. In each of the prior two quarters, inventories had swelled by more than 40%.

Still, the company ended February with inventories down from $9.3 billion at the end of November. Net income fell to $1.24 billion, or 79 cents a share, ahead of expectations of $837.8 million, compared with net income of $1.40 billion reported for the year-earlier period.

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In its current fiscal year, Nike sees gross margin down 250 basis points versus its prior outlook for a decline between 200 to 250 basis points. However, in a call with investors, Friend said the company expects pressure on profitability to ease in the next fiscal year, which begins around June.

"We have managed through cycles like this before, and we will be well prepared for the volatility that is in front of us," he said.

Meanwhile, in China, revenues fell 8% but rose 1% on a currency-neutral basis, Nike said, despite challenges in December when the country shifted its COVID-19 policies.

Following the release, Barclays upgraded Nike to an Overweight rating with a price target of $154. The company's shares slipped about 3% in after-market trading Tuesday, erasing earlier gains.