Nike’s share price rebounded strongly when the New York Stock Exchange opened on Wednesday morning after the release of the company’s third-quarter results at the end of the previous day. It opened at $80.11 as compared to $66.75 on Tuesday morning and $72.16 on Tuesday evening, partly aided by a temporary upward spurt in global stock markets following the announcement of strong measures by the U.S. administration to help out the U.S. economy during the Covid-19 pandemic.
The Nike group’s revenues for the period, ended on Feb. 29, were higher than the analysts had expected, rising by 5.1 percent to $10.1 billion globally in spite of a drop of 5.2 percent in Greater China. At $847 million, the net income was lower than anticipated, but a decline of 23.1 percent as compared to the year-ago period was largely due to extraordinary charges of $400 million related to the outsourcing of the distribution in Brazil, Argentina, Chile and Uruguay. They were partly offset by a $103 million gain from the sale of Hurley.
Like other sports brands, Nike didn’t offer any specific guidance, but investors were apparently reassured about the company’s ability to pull through the coronavirus pandemic thanks to what it has learnt in China, where it resorted heavily to digital engagement with consumers to mitigate the effect of store closures. The management indicated that its sales in Greater China will likely be about flat for the company’s present fourth quarter.
Nike deploys a Covid-19 “playbook”
Nike has reacted quickly and decisively to the coronavirus in China, the management claimed. The number of weekly active users of its activity apps was up by 80 percent between the beginning and the end of the quarter. As a result, Nike’s digital business in China grew by 30 percent during the quarter, while remaining below a 36 percent increase for the digital channel globally. It accelerated in March, leading to triple-digit growth in online demand in the past week alone. Meanwhile, nearly 80 percent of Nike’s own 5,000-plus stores in China and its 2,000 partner stores are now open and retail traffic is scoring double-digit increases.
As the management put it, Nike is now applying the same “playbook” in the rest of the world to counter the epidemic. Basically, the playbook consists of an agile response to four phases of supply chain disruption: containment of the epidemic, recovery after stores reopen, normalization in consumer demand and return to growth. In China, the containment phase lasted between five and six weeks, ending with the recent opening of Nike’s first store in the city of Wuhan, and the country is now moving from recovery to normalization.
Nike says it has applied this playbook in South Korea and Japan during the past two months, leading to early momentum in both markets. Nike was one of the first to announce the closure of its stores in the U.S., Western Europe and Australia, but it has kept its distribution centers rolling with social distancing in order to service online customers.
This past weekend, the brand launched a strong digital marketing campaign to engage customers to train at home through its app. In the U.S., it is offering its NTC Premium program of on-demand workouts and expert tips for 90 days free of charge.
Nike plans to continue to release new products in spite of the cancellation of the Olympics and other major sports events. In China, it launched some new products over the internet only, in the past few weeks. The group is working closely with strategic partners like Foot Locker, JD Sports Fashion and Zalando to play a leading role when the post-coronavirus phase will set in.
Strong sales increases globally
On a currency-neutral basis, the Nike group’s sales grew by 7 percent in the third quarter, lifted by the digital channel, which rose by 36 percent to represent more than 20 percent of its overall business including the online sales operations of third parties.
Apparel sales rose faster than those of footwear, driven by sportswear, training, basketball, women’s and kids.
The Nike brand’s sales rose by 5.1 percent to $9.61 billion, with Nike Direct and the Jordan brand recording double-digit increases. Converse rose by 9.3 percent to $506 million, with double-digit increases in Europe and in global e-commerce.
The highest growth rates were recorded in the EMEA region and in Asia-Pacific and Latin America (APLA) outside Greater China, where Nike continued to post strong momentum through mid-January. The Nike brand’s 5.2 percent decline to $1.50 billion in Greater China was the first one in 22 consecutive quarters.
Sales rose by 7.7 percent to $1.71 billion in reported terms in the EMEA region. They grew by 13 percent in terms of local currencies, with double-digit growth in most key categories, led by women’s and apparel, with online sales up by more than 40 percent. According to the company, Nike’s market share in Europe increased in both footwear and apparel.
In APLA, Nike Digital surged by 51 percent and wholesale revenues rose at a double-digit rate, leading to a 13 percent currency-neutral increase in this region as well. The Nike brand’s momentum in performance running accelerated, particularly in Japan. The Jordan brand grew by more than 50 percent.
In North America, sales went up by about 4 percent, but the rate of growth would have been about three percentage points higher without the effect of Hurley’s disposal and a new partnership with Fanatics for the brand’s NFL business. Nike Digital rose by 30 percent in the region and the Nike App grew by more than 60 percent.
Nike claims that it was the favoring sports brand in all of its 12 key cities around the world during the third quarter, gaining market share in cities like Berlin, Mexico City and Tokyo.
Margins decline
While Converse registered a promising increase of 1.9 percentage points in its operating margin, reaching a level of 19.0 percent in the quarter, the Nike brand’s Ebit margin declined by 1.8 percentage points to 16.2 percent, with slight declines in every region except in Asia-Pacific & Latin America.
The coronavirus epidemic didn’t prevent Nike from continuing to post the highest Ebit margin in Greater China, where it fell slightly by 0.3 percentage points to 36.9 percent. It declined to 23.5 percent in North America and by 21.2 percent in EMEA.
Overall, the group’s gross margin was down by 0.8 percentage points to 44.3 percent in the quarter as higher average selling prices were offset by inventory sell-through problems in China, rebates to retailers elsewhere, the cancellation of factory orders, foreign exchange losses and the incremental import tariffs in North America.
Operating costs went up by 6 percent, despite cost containment measures such as an increase of only 0.6 in demand creation expenses. The company said it will continue to manage costs carefully.
Picture: courtesy of Nike
