Chief Investment Strategist
Summary: Nike's revenue outlook for the next two quarters is weaker than expected, due to weak demand in China and North America. This is despite positive growth in other consumer markets such as retail and consumer electronics. Nike's biggest competitor in China, ANTA Sports, is growing faster than Nike, as domestic consumers are preferring domestic brands. Lululemon is also expanding into new categories, such as shoes, and is growing faster than Nike in North America. This could pose a serious threat to Nike's future growth.
Nike, the world’s largest sports apparel maker, surprised investors last night lowering its revenue outlook for the next two quarters, which means Nike expects demand to be soft until May 2024. FY24 Q2 results (ending 30 November) were in line with estimates on revenue and higher on EPS at $1.03 vs est. $0.85. Beneath the headline figures the Greater China segment disappointed with revenue at $1.86bn vs est. $1.97bn. Nike is responding to the weaker outlook by initiating a cost savings plan looking to deliver $2bn in savings with severance charges likely be booked in the current quarter ending February 2024 with charges seen at $400-450mn. Nike shares were down 12% in extended trading and both Adidas and Puma shares are trading softer in today’s European session.
Nike’s demand outlook is interesting as it is at odds with recent trends in other consumer markets. The Johnson Redbook Index for same-store sales is hovering around 4% annualised suggesting positive volume growth and FedEx reported this week that peak holiday volume was at par with last season. The recent indications from Micron Technology are also suggesting that consumer electronics have turned a corner and is expected to grow again in the coming quarters. So something is not right at Nike.
If we look at the geographical segments we observe little growth in China while its biggest competitor in that market, Chinese based ANTA Sports, grew 14% y/y in the first-half of 2023 with revenue growth expected at 17% y/y in the second half. So both Nike and Adidas are losing out in China as domestic consumers are clearly preferring domestic brands. Greater China is only around 13% of total revenue for Nike, down from 22% three years ago, so this clearly not a bigger problem going forward. Its EMEA segment revenue was up y/y so it was a decline in revenue in its North America segment that is hurting the company. As Adidas also has seen declining revenue in their recent quarter ending in September it is not Adidas that is posing a problem for Nike.
The question is, whether it is the newcomer Lululemon that is pressuring Nike as the company has expanded into new categories in 2023 such as shoes. Lululemon grew its North America revenue by 12.5% in the quarter that ended in October to $1.73bn surpassing Adidas in North America revenue. The emerging threat from Lululemon is definitely something Nike shareholders should think about in 2024.
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