Nike managed to surpass Wall Street's earnings and revenue expectations for its holiday quarter, despite facing challenges from excess inventory and disappointing sales in China. The company, like other retailers, has been grappling with inventory surplus caused by supply chain disruptions and fluctuating consumer demands, which has negatively impacted its margins.

For the quarter, Nike's gross margin dropped 3.3 percentage points to 43.3%, due to increased markdowns and promotions used to clear out inventory. While CEO John Donahoe stated last quarter that he believed Nike had passed its inventory peak, the company anticipated that gross margins would suffer during the holiday quarter.

Inventory levels were 16% higher compared to the previous year at $8.9 billion, attributed to increased product input costs and soaring freight expenses. During an earnings call, executives expressed confidence that Nike would end the fiscal year with healthy inventory levels and predicted even leaner inventory than initially anticipated, thanks to strong sales momentum.

Nike reported net income of $1.2 billion, or 79 cents per share, for the three months ending February 28, compared to $1.4 billion, or 87 cents per share, a year earlier. Sales increased to $12.39 billion from $10.87 billion in the previous year.

In China, Nike's third-largest market by revenue, the company sought a sales rebound as the region recovers from the Covid pandemic. However, sales in the region fell 8% during the third quarter to $1.99 billion, despite the lifting of the country's zero-Covid policy, which had burdened operations. Wall Street analysts had predicted sales in the region to reach $2.09 billion, according to StreetAccount estimates.

As lockdowns ended, Nike CEO John Donahoe noted growth in the Chinese market during the second month of the quarter. He emphasized the importance of innovation and connecting with Chinese consumers in a locally relevant manner to succeed in this vast and growing market.

Outside China, Nike experienced double-digit sales growth in all other markets, with North America up 27%, Europe, Middle East, and Africa up 17%, and Asia Pacific and Latin America up 10% compared to the previous year. As a result of its strong quarterly performance, Nike now anticipates fiscal year revenue to grow by high single digits, compared to the mid-single-digit guidance provided in the prior quarter.

Despite efforts to liquidate excess inventory and other costs, Nike expects gross margins to decline by 2.5 percentage points. In the following quarter, the company forecasts flat to low single-digit revenue growth, adopting a cautious approach due to uncertainties surrounding consumer confidence and the economy.

Over the past few years, Nike has focused on developing its direct-to-consumer (DTC) sales, investing heavily in experiential stores, loyalty programs, and e-commerce. Nike Direct sales increased by 17% during the holiday quarter to $5.3 billion, while Nike digital sales rose by 20%. Digital sales accounted for 27% of sales, up from 9% at the end of fiscal 2019.

Selling and administrative expenses rose by 15% to $4 billion, primarily due to wage-related expenses and Nike Direct costs. The company projects a 10% increase in full-year expenses.

To clear out inventory, Nike has relied on partnerships with wholesalers over the last two quarters. Wholesale revenues increased by 12% in the quarter, following 19% growth in the previous quarter. Nevertheless, Nike plans to reduce inventory commitments for spring and summer and anticipates a moderation in wholesale revenue over the next few quarters.