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Nike Slumps as China Weakness Weighs on Sales

Published 12/22/2023, 12:20 PM
NKE
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Shares of major global sportswear makers and retailers experienced a decline on Friday following a disappointing revenue forecast from Nike (NYSE:NKE), which led to a more than 10% drop in this stock.

Foot Locker (NYSE:FL), Under Armour (NYSE:UA), Dick’s Sporting Goods Inc (NYSE:DKS), as well as Skechers USA Inc (NYSE:SKX) and Lululemon (NASDAQ:LULU), all fell in early Friday trade after Nike said on its earnings call that it expects full-year revenue to rise by approximately 1%, a figure significantly lower than the average analyst estimate, which projected a growth of 4%.

As a result, shares rotated lower sharply after a recent rally as investors were expecting a stronger rebound in China. The market's response suggests concerns and reactions to Nike's performance and outlook, with potential implications for other companies in the sportswear industry.

Breaking Down Nike’s FQ2 Results

Nike reported revenue for the second quarter that failed to meet the average analyst estimate, causing its stock to modestly fall in response. The stock selloff has accelerated after Nike provided guidance on the earnings call.

The company’s sales for the second fiscal quarter rose just 0.5% year-over-year to $13.39 billion, slightly below the consensus of $13.46 billion. The miss is a direct result of continued softness in China, where Nike said its revenue jumped just 4.2% to $1.86 billion, missing the average analyst estimate by more than $100 million.

“Our Q2 results demonstrated how we are getting back on our front foot in our key areas of innovation and growth. This quarter showed strong execution by our team as we focus on our winning formula of innovative product, distinctive storytelling and differentiated marketplace experiences,” said John Donahoe, President & CEO, NIKE, Inc.

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Elsewhere, Nike performed in North America – its largest region by sales – in line with analyst expectations (down 3.5% YoY). EMEA revenue was also disappointing, coming in at $3.57 billion vs. $3.66 expected. On the other hand, Asia Pacific & Latin America sales jumped by 13% to $1.81 billion, easily topping Street’s expectations of $1.66 billion.

Nike generates about 60% of its revenue from footwear sales. For the second quarter, Nike reported $8.61 billion in sales, which was below the expectations for $8.69 billion. Apparel revenue came in line with expectations. Inventory dropped 14% YoY to $7.98 billion, which was another positive from the quarter.

On the bottom line, Nike reported earnings per share of $1.03 vs. expectations of 85 cents. The gross margin expanded by 170 basis points YoY, outperforming the expected 44%. However, despite these positive aspects, Nike’s stock price experienced a significant drop following the announcement.

Nike said it ended the quarter with cash and cash equivalents of $7.92 billion, a massive improvement from the same period last year and the expected $6.73 billion.

Increased Focus on Profitability and Margins

In order to appease its long-term shareholders and help its embattled stock (+4.7% vs 23.4% S&P 500), the management said it has increased focus on “strong gross margin execution and disciplined cost management.

Similar to what FedEx (NYSE:FDX) did with its DRIVE initiative, the company is strategically identifying opportunities to achieve up to $2 billion in cumulative cost savings over the next three years.

These potential savings will be realized through various measures, Nike said, including simplifying the product assortment, increasing automation and technology usage, organizational streamlining, and leveraging the company's scale to enhance efficiency.

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While a significant portion of these savings will be reinvested to fuel future growth and drive innovation at a rapid pace and on a larger scale, they also aim to enhance long-term profitability. This restructuring effort, which also includes job cuts, is anticipated to result in pre-tax charges of approximately $400 million to $450 million. These charges are expected to be recognized largely in the third quarter of fiscal year 2024.

“We see an outstanding opportunity to drive long-term profitable growth,” said Donahoe. “Today we are embracing a company-wide journey to invest in our areas of greatest potential, increase the pace of our innovation, and accelerate our agility and responsiveness.”

While analysts were calling for the management to push Nike toward a more efficient business, it seems that the decision was mostly influenced by slower-than-expected recovery in key markets like China. Although Nike’s CEO said he feels “very good” about the company’s position in China, the offered guidance on the call was more than disappointing.

Nike revised its full-year reported revenue outlook, now expecting growth of approximately 1%, a notable shift from its earlier projection of growth in the mid-single digits. The adjustment reflects a more conservative outlook for the company's revenue performance.

In the current quarter, which encompasses the second half of the holiday shopping season, Nike anticipates revenue to show a slight negative trend due to challenging YoY comparisons. Sales are then expected to increase by low single digits in the fourth quarter.

CFO Matthew Friend mentioned various risks, which were already identified in the previous quarter's guidance, including the impact of a stronger U.S. dollar on foreign currency translation, consumer demand during the holiday season, and the status of second-half wholesale order books.

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“This new outlook reflects increased macro headwinds, particularly in Greater China and EMEA. Adjusted digital growth plans are based on recent digital traffic softness and higher marketplace promotions, life cycle management of key product franchises and a stronger U.S. dollar that has negatively impacted second-half reported revenue versus 90 days ago,” he added.

Nike still expects gross margins to grow between 1.4% and 1.6%.

Summary

Nike shares fell as much as 10% after the athletic apparel and footwear retailer offered a disappointing revenue forecast, citing continued macro headwinds in China and EMEA regions. In response to slowing growth, Nike announced a plan to cut up to $2 billion in cumulative costs over the next three years.

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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.

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