Nike grows 27% year over year; resilient US consumer spending

On Tuesday evening, Nike (NYSE: NKE) reported its fiscal second-quarter results. The company easily beat expectations and posted an accelerated revenue growth rate compared with the previous quarter. Many analysts and investors, caught off guard by the strength of the numbers, pushed Nike’s share price up more than 10% in after-hours trading. In particular, it appears that the inventory issues the company had been grappling with did not weigh on growth or margins as much as feared.

Second-quarter revenue came in at $13.2 billion, up 17.3% year over year. On a constant-currency basis, which strips out the impact of the strong dollar, revenue grew 27%.

This quarter’s surge was led by North America, where sales grew about 30%. Growth in APLA (Asia Pacific & Latin America) and EMEA (Europe & the Middle East), excluding China, was also strikingly strong.

What drove this explosive growth in the quarter?

In a word, discounting.

Like other apparel companies, Nike

1) ordered too much product,

2) and that excess product arrived late (due to supply-chain issues), causing inventories to pile up.

That’s what happened.

So in the first quarter of Nike’s fiscal year, CFO Matthew Friend said the company would run heavy promotions to clear excess inventory, and that margins would shrink as a result (because they would be selling at lower prices). Indeed, gross margin fell 300 basis points, or 3 percentage points, from a year earlier.

However, because the results still came in far better than analysts and investors had expected, the stock responded with a sharp spike in after-hours trading.

Nike apparel is not cheap. Where did everyone find the money to buy all that Nike gear?

Statistics show that, because of surging inflation, the US personal savings rate has dropped to a historic low. Isn’t that puzzling?

Did people really have a reason to buy Nike even at the expense of saving less, or did they have some kind of safety net that gave them the confidence to keep spending?

As is so often the case, the answer lies somewhere in between.

Checkable deposits show how much money sits in checking accounts that can be used for payments, and the balances there have been rising every quarter, hitting all-time highs.

So while Americans’ savings rate has fallen to the floor, the amount of cash they hold has climbed to record levels.

One thing that’s hard to wrap your head around is how cash balances can keep rising so steeply when the savings rate is declining.

Some argue it’s because people have been pulling money out of real estate and stocks.

We can’t say for sure exactly why cash holdings keep increasing, but when you look at next year’s US consumer spending,

it doesn’t look all that weak.

As for Powell… let’s just leave it there.