Market news and our thoughts on Nike.
Market News
US equity markets rallied last night – S&P 500 (+1.1%); Nasdaq (+1.6%) – after lacklustre economic data supported the case for the Fed to pause rate hikes. US futures rallied as Nvidia jumped 6.6% post-market after the company released strong results and a blowout revenue forecast on AI demand. The company seemed to dispel one of investors’ biggest concerns: that chip production won’t keep up with demand. Supply will “substantially increase for the rest of this year and next year,” said CEO Jensen Huang.
This morning in Asia, markets were also firm, spurred on by chip stocks: Nikkei 225 (+0.9%); Hang Seng (+2.0%); Shanghai Composite (+0.3%). The FTSE 100 is currently trading 0.6% higher at 7,367. Companies trading ex-dividend this morning include Aviva (2.92%), Diageo (1.50%), Haleon (0.55%), Land Securities (1.51%), and L&G (2.60%). Sterling buys $1.2705 and €1.1695.
The 10-year Treasury currently yields 4.21%. Demand for TIPS (inflation-linked bonds) faces a big test today, with an $8bn auction of 30-year debt at a time when yields on the maturity are around the highest in more than a decade. Gold continued its recent recovery to trade at $1,921 an ounce.
Oil dropped to $82.39 a barrel as signs of a thaw in US relations with Iran and Venezuela undercut supply concerns. This comes as global stockpiles sit at a multi-year low. European natural gas prices tumbled on signs the Australian LNG labour dispute will be resolved.
Source: Bloomberg
Company News
Over the last few days, two of the leading US-listed sportswear retailers, Dick’s Sporting Goods and Foot Locker, have released negative results which have sent their shares down 25% and 35% respectively. In response, the shares of Nike, Adidas, and Puma have also fallen, albeit by a lesser amount.
Foot Locker is a leading footwear and apparel retailer with 2,600 retail stores in 26 countries. Although its results for its second quarter (ended 29 July) were broadly in line with expectations – revenue of $1.86bn and EPS of 4c – the company lowered its guidance for the full year.
Comparable-store sales fell by 9.4%, driven by ongoing consumer softness, changing vendor mix, and the repositioning of its Champs Sports brand, which fell 25.3%. The company saw softening in trends in July, a month typically when back-to-school shopping begins. North America endured the bulk of the decline, down 12.4%. By category, apparel was worse impacted (down mid-teens), versus footwear (down high single-digits) and accessories (down low double-digits). However, we note the core Foot Locker brand was only down 4.6% in North America and was flat in Europe and up 5.7% in the APAC region.
Foot Locker’s gross margin fell by 460 basis points, driven by higher promotional activity (which included higher markdowns) and inventory shrink (retail theft). On a positive note, inventory remains up but is moderating.
In response, the group adjusted its full-year outlook to allow it to “best compete for price-sensitive consumers”. The company now expects its full-year comparable sales to fall by 9.0%-10.0% versus its previous forecast for a 7.5%-9.0% decline. EPS guidance was cut from $2.00-$2.25 to $1.30-$1.50 (down 34% at the mid-point) as more aggressive mark-downs will reduce gross margin. The company is also planning to cut its quarterly cash dividend to ensure it has the flexibility to continue to fund strategic investments.
The day before, the message from industry rival Dick’s Sporting Goods was similar. In the quarter ended July, revenue rose by 3.6% to $3.22bn, in line with the market expectations. However, the gross margin fell by 160 basis points due, in part, to an increase in inventory shrink, or retail theft. The company also announced a new restructuring programme. The group generated EPS of $2.82, below the market expectation of $3.81. In response EPS guidance was lowered from $12.90-$13.80 to $11.33-$12.13, down 12% at the mid-point.
Looking at the implications for Nike, we would make a few points.
Nike is the world’s leading sports footwear and apparel company and considered to be the best-in- class operator. Its revenue is split into direct sales (both online and through Nike-owned stores) and wholesale revenue from third party retailers, such as Dick’s Sporting Goods and Foot Locker. Part of the group’s strategy has been a shift from wholesale to direct sales, in particular online sales.
Digital penetration is expected to reach 50% (vs. 26% in FY2023). This will have a long-term financial benefit for the group – on average, a sale of an incremental unit via digital generates double the revenue for Nike versus a sale to wholesale, with a 10% higher gross margin, translating into two times the operating income dollars.
Nike has been seeing faster growth in its direct-to-consumer channels – in its last 10-K financial report, the group highlighted that in the three months to 31 May, it achieved positive direct-to-consumer performance in all regions, while wholesale growth was negative in North America and the EMEA region. In North America in particular, wholesale was down 4% in the May quarter and DTC was up 15%.
Greater China is also important for Nike and the company saw a return to double-digit growth in the three months to end May. Although economic data coming out of the region has been mixed, consumers appear to be spending again, with both the group’s Nike and Jordan brands strong in the region.
While the industry is clearly suffering from a near-term malaise, we remain positive on the long-term outlook. We believe Nike is well placed to benefit from a growing market driven by increased consumer demand for healthier living – the recognition of which increased during the pandemic – the shift to personalised products, and growth of digital sales. Nike has a very strong brand, an impressive track record of product innovation, and is seeking to be more personal with its consumers at scale.
In the current quarter (to end August), growth is expected to be flat to up low single-digits, reflecting the group’s decision to tighten first-half buys and restrain marketplace inventory. Nike will report on this period at the end of September.
Looking further out to the full financial year to May 2024, the group previously highlighted it was closely monitoring the macro environment, consumer behaviour, and retail trends, but pointed to a robust product innovation pipeline, healthy inventory, and a normalised flow of supply. Revenue is expected to grow by mid-single digits, led by Nike Direct and a focus on healthy full-price growth.
Source: Bloomberg