Bloomberg

By Kim Bhasin

September 28, 2023 at 4:29 PM EDT

Updated on September 29, 2023 at 9:46 AM EDT

Nike Inc. shares jumped after surprise quarterly results indicated that demand for the sportswear giant’s goods is strong — and growing — despite a challenging consumer environment.

“Our top franchises are driving strong full-price sales,” Chief Financial Officer Matt Friend said on the analyst call.

Earnings of 94 cents a share exceeded expectations. And gross margin, a key gauge of profitability, was higher than expected. The shares rose as much as 11% on Friday in New York trading, the biggest gain since late December. The stock had dropped 23% year-to-date through Thursday’s close.

Though revenue in China fell short of analyst expectations, executives expressed confidence that business in the region is poised for a rebound.

“Sport is back in China. You can just feel it,” Chief Executive Officer John Donahoe said on the Thursday call. “That gives us great confidence about the future and the Chinese consumer in our segment regardless of the macroeconomic outlook there.”

Analysts concede that the quarter had some shortcomings, but they were pleased by the performance during the period.

“This wasn’t the cleanest quarter we’ve seen, but given the tough macro environment and some of the marketplace inventory challenges (admittedly self-inflicted), it was better than many investors thought we’d see,” Wedbush analyst Tom Nikic wrote.

Revenue of $12.9 billion for the quarter through August was just short of Wall Street’s average estimate. Inventory fell 10% to $8.7 billion, a bigger decline than analysts expected and a sign Nike is making progress in moving out older merchandise for newer, more-profitable items.

We’re very comfortable with the level of inventory in the marketplace, in relation to the retail sales that we’re seeing,” Friend said.

Nike has been offering discounts to get excess merchandise off store shelves — a strategy that erodes profitability. So the decline in inventories signals that the company’s tighter management is paying off.

Adidas AG and Puma SE shares each gained more than 7% in Frankfurt Friday on investors’ hopes that shoemakers will have more pricing power when the surplus of footwear gets cleared out of the market.

Nike also reiterated its guidance for the full year. Revenue is seen rising in the mid-single digits, with margins up as much as 160 basis points.

Management expects second-quarter revenue growth to be up slightly, while gross margin is seen expanding about 100 basis points.

“Nike’s unchanged fiscal 2024 guidance and expectations for 100 bps of gross-margin expansion in 2Q are encouraging, given recent sentiment around slowing consumer-spending trends,” Bloomberg Intelligence analysts Poonam Goyal and Abigail Gilmartin wrote.

In Nike’s home market of North America, revenue fell 2%, just missing expectations. Sales in the Greater China region cooled as well, with growth of 4.8% coming in short of estimates. Executives said Nike is still gaining market share in China.

The company reported high-single digit to low-double digital growth with its retail partners, including Dick’s Sporting Goods Inc. in North America. It’s currently undergoing a “reset” with longtime partner Foot Locker Inc., with sales expected to decline in the near-term, Friend said.