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Dec 20, 2021

Nike gains as growth in U.S. helps overcome China collapse

This earnings season it will be all about how companies are managing elevated input costs: Strategist

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Nike Inc.’s business in China plummeted last quarter, but growth in the U.S. saved its results, boosting the shares.

Revenue in North America rose 12 per cent, helping offset a 20 per cent drop in China, as overall sales slightly surpassed analysts’ expectations. The stock rose as much as 4.8 per cent in after-market trading.

Coming into the report, the world’s largest athletic brand was dealing with production delays mainly from a COVID-19 outbreak in Vietnam that shuttered factories. Those disruptions hurt results in China and other Asian markets, Nike said. But the company got enough goods that were stuck in transit to the U.S. and Europe to fill demand.

In Vietnam, Nike said all the factories it works with are back up and running after it had to cancel orders totaling about 130 million units. One major issue is that a big portion of the workforce fled to the countryside when COVID restrictions were lifted earlier this year. However, attendance rates are improving, the company said. 

Nike once again showed how its push to sell more sneakers through its own stores and websites is helping profitability. The so-called direct business boosted revenue 9 per cent to US$4.7 billion. This division now accounts for about 40 per cent of its total sales.

Those gains helped gross margin rise 2.8 percentage points to 45.9 per cent. Profit was also aided by fewer markdowns -- a trend seen across the retail industry because robust demand is coming at a time of lower inventories caused by COVID-triggered supply-chain issues.

The company also expects gross margin to expand 1.5 percentage points this quarter as revenue gains a low-single-digit percentage. 

Overall, Nike reiterated forecast that sales this fiscal year, which is now in the third quarter, will gain at a mid-single-digit percentage. That prediction accounts for the omicron variant that is causing cases to surge in several parts of the world. 

The decline in China also raises questions about how much calls for boycotts there are hurting the brand. Nike, and other western brands, have been criticized over their stance on labor in the country’s Xinjiang region.