Morning Note: Market news and an update from Nike.

Market News

Iran fired about 200 ballistic missiles at Israel in a sharp but brief strike, with many of them intercepted. Crude rose to a session high – Brent Crude is currently $75.30 a barrel – after Axios reported Israel will launch “significant retaliation” against Iran and may target oil production sites. Gold moved up to $2,655 an ounce.

US equities fell in response to the increased Middle East tension – S&P 500 (-0.9%); Nasdaq (-1.5%). Nike fell after hours (see below). Tesla is expected to post its first quarterly sales increase this year. The carmaker probably delivered about 7% more EVs than a year ago.

In Asia this morning, equities surged in Hong Kong (Hang Seng, +5.5%). Hedge funds are piling into Chinese stocks at a record pace, driven by Beijing’s stimulus plans. In Japan, the Nikkei 225 fell by 2.2%. Shigeru Ishiba agreed to continue strengthening the Japan-US alliance and further build ties with allies in his first phone call with Joe Biden since becoming Japan’s PM.

The FTSE 100 is currently trading 0.3% higher at 8,301. BP and Shell continue to recover off their recent lows. Sterling trades at $1.3290 and €1.2008.

The ECB is likely to lower borrowing costs in October and beyond, but the market’s easing expectations appear exaggerated, Governing Council member Martins Kazaks said.

Source: Bloomberg

Company News

Last night, Nike released results for the first quarter of its financial year to end May 2025, which largely met management expectations. However, the company warned its near-term revenue expectations have moderated. Given the forthcoming CEO transition, and with three quarters left in the fiscal year, Nike has withdrawn its full-year guidance for FY2025, although the company will provide quarterly guidance. In response, the shares fell by 6% in after-hours trading. Although the near-term outlook remains uncertain, there are some signs of encouragement, and we believe the change in CEO will inspire a turnaround in the business, allowing Nike to participate in an attractive long-term growth industry.

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 increased consumer demand for healthier living – the recognition of which increased during the pandemic – and the shift to personalised products. 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.

However, in the near-term, the group is faced with a number of challenges:

·       the rebalancing of the business from a concentration on key product franchises (Air Force 1, Air Jordan 1, and Dunk) towards new products,

·       a subdued macroeconomic backdrop with continued promotional activity,

·       increased competition from new brands such as On and Deckers’ Hoka,

·       an admission that the company was too aggressive with its push with Nike Direct sales (in particular digital) at the expense of wholesale partners which are essential to elevate its brand and grow the total marketplace.

The company has accelerated its multi-year cycle of innovation and pulled forward several innovations, including the Air platform (both performance and lifestyle), Running (Vomero, Structure, and Pegasus), and Women’s. At the same time, Nike is carefully managing its most important franchises for long-term health and, as a result, the product portfolio is going through a ‘period of transition’ which is expected to continue in the current financial year.

Last month, the company named former senior executive (and 30-year Nike veteran) Elliott Hill to succeed John Donahoe as CEO from 14 October. Given much of the recent corporate malaise has been seen as a management/strategy issue, the announcement was greeted positively by the market on hopes that Nike will return to its roots and the culture that made it so successful. However, change will take time.

Given the group’s CEO transition, and with three quarters left in the fiscal year, Nike has withdrawn its full-year guidance for FY2025, and will instead provide quarterly guidance for the balance of the fiscal year. This will provide the incoming CEO with the flexibility to re-connect with employees, evaluate the current strategies and business trends, and develop plans to best position the business for FY2026 and beyond. In addition, the company announced its previously announced Investor Day is being postponed.

Back to last night’s results. In the three months to 31 August 2024, revenue fell by 9% on a currency-neutral basis to $11.59bn, versus the company guidance for a 10% decline and the market estimate of $11.65bn.

The company delivered lower unit sales than it expected, partially offset by a higher selling price. Traffic declines across Nike Direct were more significant than the company anticipated, with particular softness in traffic on Nike Digital, especially in the three classic franchises. Greater China was weaker than expected due in part to the softer macro environment.

Encouragingly, partner feedback on the future product pipeline has been very positive, particularly in the Running segment.  However, the company admits that the environment is very competitive, and it will take time to expand market share. This was reflected in Nike’s spring ’25 order books, which came in roughly flat versus the prior year, a little lighter than management had planned.

Nike Brand sales were down 9% to $11.1bn, while the Converse brand fell by 14% to $501m. By region, Nike Brand revenue declined across all geographies: Asia Pacific & Latin America (APLA, -2%); Greater China (-3%); North America (-11%); and Europe, Middle East, & Africa (EMEA, -12%).

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 fell by 12% to $4.7bn, with digital down 20% and stores up 1%. Wholesale fell by 7% to $6.4bn.

The gross margin rose by 120 basis points to 45.4%. This was primarily due to lower NIKE Brand product costs, lower warehousing and logistics costs, and benefits from strategic pricing actions from the prior year.

Selling and administrative expenses fell by 2%, with demand creation expense (i.e., marketing) up 15%, reflecting investment in key sports events. Operating overhead expense was down 7% due to lower wage-related expenses. EPS declined by 26% to 70c, versus the market forecast of 52c.

Inventories continued to fall, down 5% in the quarter to $8.3bn, primarily reflecting product mix shifts and lower product input costs. The group’s balance sheet remains very strong – with net cash of c. $1.3bn. 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 the current quarter, the company expects revenue to be down in the 8%-10% range. The gross margin will fall by around 150 basis points, with higher promotions, channel mix headwinds, and supply chain deleverage more than offsetting lower product costs and decreasing benefit from strategic pricing actions.

Although the group is no longer providing full-year guidance, management has provided some colour on the current trajectory of the business. Revenue expectations have moderated since the start of the year, given traffic trends on Nike Digital, retail sales trends across the marketplace, and final order books for spring. However, the company continues to see indications of slight second-half improvement in revenue trends versus its first half. The company now expect gross margins to decline versus prior year versus previous expectations for growth of 10-30 basis points.

Source: Bloomberg