Morning Note: Market news and a subdued update from Nike.

Market News

This morning in Asia, equity markets have kicked off the new year on a subdued note following the release of weak Chinese data: Hang Seng (-1.6%); Shanghai Composite (-0.4%); Nikkei 225 (holiday). The FTSE 100 is currently trading 0.2% higher at 7,753, while the S&P Futures currently predict a 0.3% rise at the open this afternoon.

The 10-year Treasury currently yields 3.94%, while gold moved up to $2,075 an ounce. Bitcoin surpassed $45,000 for the first time in nearly two years on ETF approval hopes.

UK Food Inflation decelerated to 6.7% in December, its eighth consecutive decline to its slowest since June 2022, the British Retail Consortium said. Sterling trades at $1.2750 and €1.1560.

The oil price moved up to $78.20 a barrel as Iran sent a warship to the Red Sea in response to the U.S Navy’s sinking of three Houthi boats. Maersk halted transits through the waterway for 48 hours to assess the security situation.

Chinese President Xi Jinping pledged to strengthen economic momentum and job creation. ASML cancelled some China shipments weeks ahead of a January deadline following a request from the US, people familiar said. The manufacturer had licenses to ship three top-of-the-line deep ultraviolet lithography machines to Chinese firms until this month, when new Dutch restrictions take full effect.

Source: Bloomberg

Company News

Just before Christmas, Nike released results for the three months to end October 2023, the second quarter of its financial year to May 2024. The figures were better than market expectations, but investors were spooked by management comments on the near-term revenue outlook and guidance downgrade. In response, the shares fell by 10%.

Nike is the world’s leading sports footwear and apparel company. We are positive on the long-term outlook for the business, with the company 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. For the period to FY2025, the company is targeting revenue growth of high single-digits to low double-digits; gross margin in the high 40s (vs. 46% in FY2022); operating margin in the high teens; EPS growth in the mid to high teens; and a return on invested capital of 30%+.

During the quarter, revenue fell by 1% on a currency-neutral basis to $13.4bn. The group saw indications of more cautious consumer behaviour around the world in an uneven macro environment. Total retail sales across the marketplace fell short of management expectations, with softer demand outside of the key ‘consumer moments’. While Nike Store traffic continued to grow, the company saw softness in digital traffic, and higher levels of promotional activity across the marketplace.

Nike Brand sales were flat at $12.9bn, while the Converse brand fell by 13% to $519m. By product, footwear, which accounts for 67% of sales was flat, with apparel down 2% and equipment up 15%.

By region, Nike Brand revenue generated currency-neutral growth in Asia Pacific & Latin America (APLA, +10%) and Greater China (+8%), offset by declines in North America (-3%) and Europe, Middle East, & Africa (EMEA, -3%).

Nike Brand sales are split into direct sales (both online and through Nike-owned stores) and wholesale revenue from third party retailers. During the quarter, Nike Direct sales grew 4% to $5.7bn, with digital up 1% and stores up 9%. Wholesale fell by 3% to $7.1bn.

During the latest quarter, the gross margin increased by 170 basis points to 44.6%, better than the guidance for a 100 basis points rise. This reflected strategic pricing actions, improved markdowns, and lower ocean freight rates, partially offset by higher product input costs. Selling and administrative expense grew 1%, with demand creation expense (i.e., marketing) up 1%. Operating overhead expense was flat as an increase in Nike Direct variable costs were offset by lower technology spend and wage-related expenses. EPS grew by 21% to $1.03, better than the 85c market forecast.

Inventories continued to fall, down 14% to $8.0bn, primarily driven by a decrease in units. The group’s balance sheet remains very strong – with cash and short-term investments of $9.9bn and net cash of c. $1.0bn. During the quarter, the group bought back $1.2bn of its own stock as part of its 4-year $18bn share repurchase programme, while the quarterly dividend was raised by 9% to 37c.

In light of the current trading environment, Nike announced an enterprise initiative to accelerate future growth while building a faster, more efficient company. The aim is to deliver up to $2bn in cumulative cost savings over the next three years from simplifying the group’s product assortment, increasing automation and use of technology, streamlining the organisation, and leveraging scale to drive greater efficiency. Most of these savings will be invested to fuel future growth, accelerate innovation, and drive greater long-term profitability. This will result in pre-tax restructuring charges of $400m-$450m that will largely be recognised in the current quarter, primarily associated with employee severance costs.

Looking forward, and considering the increased macro headwinds, the group has adjusted its outlook for the full financial year to May 2024. In the current quarter, reported revenue is expected to be slightly negative, as the business compares to double-digit growth in the prior year. In the three months to May 2024 (i.e. Q4 FY2024), reported revenue is forecast to be up low-single-digits, with full-year reported revenue now growing approximately 1%. This is a downgrade from previous guidance for mid-single digit growth (and a market forecast of c. 4%) and reflects increased macro headwinds, particularly in Greater China and EMEA; adjusted digital growth plans, based on recent digital traffic softness and higher marketplace promotions; lifecycle management of key product franchises; and a stronger US dollar. The gross margin is still expected to expand by 140-160 basis points on a reported basis.

Source: Bloomberg