Morning Note: Market news and an update from Nike.
Market News
After a five-day drop that shaved more than a trillion off share prices, Wall Street put the longest equities losing streak since April behind it on Friday: S&P 500 (+1.3%); Nasdaq (+1.8%). The dollar continue to power ahead, while the 10-year Treasury yields 4.62%, the highest level since May. Two Federal Reserve policymakers said the inflation fight isn’t over and there’s more work to be done to reach the 2% goal. Recent economic data showed US manufacturing rose at a modest pace in the final month of 2024. The Institute for Supply Management’s gauge hit 49.3, topping estimates, but remained below 50, a level that indicates economic expansion.
In Asia this morning, a gauge of Asian currencies hit its lowest in almost two decades against the dollar. Equity markets equities fluctuated, with gains from a buoyant chip sector countered by declines in Japanese stocks: Nikkei 225 (-1.5%); Hang Seng (-0.5%); Shanghai Composite (-0.2%). The oil price continued its strong start to the year, with Brent Crude currently trading at $76.50 a barrel. Gold slipped to $2,626 an ounce.
The FTSE 100 is currently little changed at 8,224. According to the British Chambers of Commerce, business confidence is at its lowest since the Truss mini-budget. The lobby group said more firms slowed investment than accelerated it over the past three months. Sky News reports that ‘more than half of firms plan to raise prices' as tax hikes loom. Sterling trades at $1.2455 and €1.2064.
Alcohol stocks fell after the US Surgeon General said alcoholic beverages should display warning labels indicating cancer risk. Vivek Murphy said alcohol is responsible for about 20,000 cancer deaths annually in the US.
US mortgage rates on 30-year fixed loans are approaching 7%, a near six-month high. High borrowing costs have weighed on home affordability, MBA’s index of home-purchase application have slid nearly 7% to the lowest level since mid-November.
Source: Bloomberg
Company News
Just before Christmas, Nike released results for the three months to 30 November 2024, the second quarter of its financial year to end May 2025, which largely met management expectations. The new CEO outlined his plan to return the business to growth, albeit with an admission that some of the actions will have a negative impact on the company’s near-term results. Nike continued to grow its dividend and remains confident in the outlook for the business.
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 and the shift to personalised products. Nike has a very strong brand and an impressive track record of product innovation.
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.
In response, the company has appointed former senior executive (and 32-year Nike veteran) Elliott Hill as CEO. Given much of the recent corporate malaise is down to management/strategy, the hope is that Nike will return to its roots and the culture that made it so successful. Immediate action has been taken to reposition the business, although change will take time and “turnaround efforts may hurt in short term”.
Early observations from the new CEO include the need to ‘lead with sport and put the athlete at the centre of every decision, leveraging athlete insights to accelerate innovation, design, and product creation. The company has also seen traffic in NIKE Direct, digital and physical, soften because of a lack newness in product and too much promotional activity. In response, Nike has accelerated its multi-year cycle of innovation and pulled forward several innovations, especially in high-volume areas like running, training, football, sportswear, and Jordan. It is also shifting NIKE Digital to a full-price model and reducing the percentage of the business driven by promotional activity. The company is going to continue to be aggressive in sports marketing across leagues, associations, teams and individuals. Overall, the focus is on the areas that will make the most immediate impact.
Back to the results. In the three months to 30 November 2024, revenue fell by 9% on a currency-neutral basis to $12.4bn, versus the company guidance for a decline in the 8%-10% range and the market estimate of $12.1bn. Performance reflected ongoing headwinds from the group’s franchise management actions. Traffic and retail sales across the marketplace fell below management expectations, especially in September and October. However, in November, momentum built, with digital and physical traffic inflecting positive.
Nike Brand sales were down 8% to $12.0bn, while the Converse brand fell by 18% to $429m. By region, Nike Brand revenue declined across all geographies: Asia Pacific & Latin America (APLA, -2%); Greater China (-11%); North America (-8%); and Europe, Middle East, & Africa (EMEA, -10%).
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 14% to $5.0bn, with digital down 21% and stores down 2%. Wholesale fell by 4% to $6.9bn.
The gross margin fell by 100 basis points to 43.6%. This was better than the guidance for a 150bps decline and primarily due to higher discounts and changes in channel mix, partially offset by lower product input costs as well as lower warehousing and logistics costs. Selling and administrative expenses fell by 3%, with demand creation expense (i.e., marketing) up 1%, reflecting investment in key sports events. Operating overhead expense was down 5%, partly due to lower wage-related expenses. EPS declined by 24% to 78c, versus the market forecast of 63c.
Inventories were flat in the quarter at $8.0bn, reflecting an increase in units offset by lower product input costs and product mix shifts. The group’s balance sheet remains very strong – with net cash of c. $0.8bn. During the quarter, the group bought back $1.1bn of its own stock as part of its 4-year $18bn share repurchase programme, while the quarterly dividend was raised by 8% to 40c, marking the 23rd consecutive year that Nike has increased its payout.
Given CEO transition, Nike is currently only providing quarterly guidance rather than annual guidance. Over the near term, the net effect of the company strategic actions will result in lower revenue, additional gross margin pressure and higher marketing expenses, with a greater headwind to the fourth quarter compared to the third quarter.
In the current (third) quarter, the company expects revenue to be down in the low double-digits, while the gross margin will fall by 300-350 basis points, reflecting the actions described above to clean and to reset the marketplace.
Source: Bloomberg