ii view: Nike shares toppled by sales warning

Fourth-quarter results to 31 May

• Revenue down 2% year-over-year to $12.6 billion
• Earnings up 50% to $0.99 per share
• Share buybacks of $1 billion

Chief executive John Donahoe said 

“We are taking our near-term challenges head-on, while making continued progress in the areas that matter most to Nike's future – serving the athlete through performance innovation, moving at the pace of the consumer and growing the complete marketplace. I'm confident that our teams are lining up our competitive advantages to create greater impact for our business.”

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ii round-up:

Sports footwear and clothing maker Nike Inc Class B (NYSE:NKE) reported quarterly sales below Wall Street estimates and forecast a double-digit drop in current first-quarter sales, partly due to weakness in China.

Fourth-quarter sales of $12.6 billion missed analysts’ forecasts of $12.8 billion, hindered by a lack of new innovative products, with footwear sales in its core North American market dropping 6% from a year ago to $3.6 billion. Sales for the current quarter to late August are expected by management to fall 10%, comfortably below forecasts for a 3% decline, with Nike also citing ‘uneven’ global consumer trends. 

Shares in the Dow Jones company fell 11% in afterhours post-results trading having come into this latest news down around 13% year-to-date. That compares to a 21% gain for German rival adidas AG (XETRA:ADS) and a near 4% gain for the Dow Jones index.

Nike sales for the year to late May rose 1% on a currency adjusted basis to $51.4 billion. Excluding the pandemic impacted 2019/2020, that’s its slowest rate of growth since 2010.

Nike now expects sales for the year ahead to fall by mid-single digits, a reverse from its previous forecast for growth, and below Wall Street hopes of a 1% gain. 

Fourth-quarter adjusted earnings rose 50% versus Q4 a year ago to $0.99, beating estimates of around $0.83 per share. In late 2023, Nike flagged plans to potentially cut up to $2 billion in costs over the next three years. In early 2024 it announced the loss of 1,500 jobs, or 2% of its workforce. 

Direct sales via its own website and stores fell 8% during this latest quarter from a year ago to $5.1 billion. Sales via wholesalers and therefore other retailers such as Foot Locker climbed 5% to $7.1 billion. 

First-quarter results are likely to be announced mid-to-late September.   

ii view:

Started in 1964, Nike sold the majority (56%) of its products via its wholesale channel in its latest financial year, with the balance direct via its website and own branded stores. Footwear remains its biggest seller at 68% of revenues, followed by clothes at 28% and equipment the balance. 

Geographically, North America generates its biggest slug of sales at around 43%, followed by Europe, the Middle East and Africa at 28%, China at around 15% and Asia and Latin America the rest.  

For investors, heightened borrowing costs will be having some dampening impact on customer spending. The changing impact of fashion warrants consideration, with sales for its Converse brand down 14% year-over-year, and costs broadly for businesses remain elevated. Relations between the West and its major market China remain strained, with the outlook for its economy uncertain, while environmental considerations for the wider fashion industry should not be ignored. 

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On the upside, group initiatives to cut costs are underway, with the use of tech driven automation a focus. Diversity of both product and geographical region exists, interest rate cuts, especially in its home US market, should assist demand, while shareholder returns remain a focus with the dividend payment having increased more than 20 years in a row. 

For now, the strength of the Nike brand will likely convince fans of this sporting icon to remain loyal. That said, pedestrian year-over-year sales and a somewhat downbeat outlook may, for now, keep potential new investors on the sidelines. 

Positives: 

• Product and geographical diversity
• Ongoing shareholder returns

Negatives:

• Uncertain economic outlook
• Subject to currency moves

The average rating of stock market analysts:

Buy