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Jun 28, 2022

Nike skids on downbeat forecast amid cautious China stance

Nike outpaces top-line expectations

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Nike Inc. stock fell Tuesday after the world’s largest sportswear company gave a downbeat full-year forecast as sales slide in the vital China market.

The retailer said it expects gross margin to be flat to down 50 basis points, even as it reported results that surpassed analysts’ estimates and overcame supply-chain pressures that have persisted for many months. Management said revenue is likely to grow by a low double-digit percentage this fiscal year.

Nike shares dropped more than 2.5 per cent in pre-market trading Tuesday. The stock has fallen about 34 per cent this year through Monday’s close.

Sales in the Greater China region, where Nike has struggled over the past year, fell 20 per cent in the quarter at constant currencies and missed analysts’ estimates. COVID-19 shutdowns hurt its business there last quarter, but executives said that the company still sees China as a long-term growth market and will continue to invest in the region.

“We did take a cautious approach to Greater China,” Chief Financial Officer Matt Friend said on a conference call with analysts. “And we’re doing that as we look at what disrupted our performance in the fourth quarter.”

Nike said over 60 per cent of its business in China was affected by Covid disruptions across more than 100 cities. Its central logistics center took three weeks to return to 100 per cent capacity.

Besides the COVID impact, the growing nationalism among Chinese consumers, particularly young shoppers, is driving more purchases away from western brands to the local labels. For the sneaker category on Alibaba Group Holding Ltd.’s Tmall, Nike and Adidas AG reported double-digit declines from a year ago for most of the months since March last year, while the local sports giants Anta Sports Products Ltd. and Li Ning Co Ltd. sustained the growth momentum in 2021 and posted smaller sales drop than foreign rivals this year amid the COVID flareups in the country, according to analytics firm Hangzhou Zhiyi Technology Co. 

Global sales rose 3 per cent on a constant-currency basis for the quarter ended May 31, to US$12.2 billion. Analysts had expected US$12.13 billion, according to estimates compiled by Bloomberg. Meanwhile, constant-currency revenue jumped 20 per cent in Europe, the Middle East and Africa, and 24 per cent in Asia Pacific and Latin America, countering declines in North America and China. 

Chief Executive Officer John Donahoe had pulled back wholesale accounts in recent years to refocus Nike on its own e-commerce while investing in the partners that remain, such as Dick’s Sporting Goods Inc. Direct-to-consumer revenue rose 15 per cent, excluding currency effects.

Production issues due to COVID-related factory shutdowns have been resolved, but the shipping logjams that continue to stifle international trade routes are still troubling Nike. Inventory swelled 23 per cent, with the company saying many items were stuck in transit.