If China Is Collapsing, Nobody Told Nike
China is in the midst of a delicate transition from an economy driven by major infrastructure projects to one more influenced by consumer spending, and that transformation is hitting a rough patch. But Thursday’s quarterly earnings report from Nike shows that for some companies demand remains more than healthy.
Nike recorded a 30% increase in Greater China sales for the three months ended Aug. 31, hardly what might be expected in an economy tumbling off a cliff. Greater China sales of $886 million are still just over 10% of Nike’s total $8.4 billion revenue, but were easily its fastest growing segment. (Excluding the effect of the stronger dollar Japan sales grew faster at 35%, but exchange effects knocked that to just 12%).
Profits in Greater China rose 51% to $330 million as the region approaches Western Europe ($1.6 billion and down 4% year-on-year) for the greatest share of Nike profit behind North America, which accounted for $1 billion of the company’s $1.6 billion in profit and grew 7% from the year-earlier period.
On a per-share basis Nike’s earnings of $1.34 blew past the consensus estimate of $1.19. “Fiscal 2016 is off to a great start,” CEO Mark Parker said in the company’s release. The results sent shares surging more than 7% to a record high of $123.92, giving the company a $105 billion market capitalization, and analysts are bullish about the rest of fiscal 2016 with a big moneymaker looming in next summer’s Rio Olympics. Nike has already bucked this year’s market weakness, gaining 30% to the S&P 500′s 6% fall even before Friday’s opening spike.
Given the backdrop of a scuffling Chinese economy — some critics argue the nation is slipping toward a recession — it isn’t entirely clear whether the country’s consumers are healthier than appears or if certain high-profile brands are simply able to withstand a slowdown better than others. (If the latter is true, Nike’s strong quarter likely bodes well for Apple’s forthcoming iPhone launch in China, when the 6S and 6S Plus go on sale.)
Thursday’s results came against a backdrop that doesn’t seem all that encouraging. E-commerce giant Alibaba has cautioned that the slowdown in China’s economy could restrict its sales volume, a trend that will effect many other consumer-facing companies. It bears asking whether Nike’s solid results are merely the calm before the storm, but company executives expressed confidence on the earnings call.
“The piece that we continue to look at is the brand in China is extremely strong,” said president of brand Trevor Edwards. “[W]e are very mindful of the economic, macroeconomic volatility in the marketplace.” Even with that volatility Nike feels “very, very good about the business,” he added.
Nike “exceeded expectations on nearly all fronts” in the quarter, accoridng to Jefferies analyst Randall Konik, even in regions “where market fears were greatest given economic turbulence.” That, the analyst wrote “should quell fears about demand health in choppy macro environments.”
Helping Nike is the fact that it’s coming off a significant “reset” of its China business after struggling through much of fiscal 2013 and periods of fiscal 2014. Having completed that effort, the company’s new distribution points and improved merchandise strategies set the company up to withstand any broader weakness. Nomura analyst Robert Drbul projects fiscla 2016 revenue growth of 17% in China and argues “the region has now entered a ‘new normal’ of exceptional brand strength and productivity.
Basketball is of particular importance to Nike’s Chinese opportunity, and the company announced this week that Michael Jordan is traveling to Shanghai next month to commemorate the 30th anniversary of his eponymous franchise (a franchise that landed Jordan on the Forbes billionaires list and earns him $100 million a year). During the last quarter, current NBA stars Lebron James, Kobe Bryant, Anthony Davis and Paul George appeared at promotional Nike events in China as well.
Nike’s results illustrate the challenge of trying to put a macroeconomic lens on stockpicking. With 10% sales exposure to China, Nike could certainly land in a bucket of stocks being shunned because of the slowdown there, alongside companies like Yum Brands, or the host of chipmakers that generate a significant portion of their sales in China. Yum for instance, a consumer-facing business that owns Taco Bell and KFC, saw its China same-store sales drop 10% in the June quarter, the most recent for which figures have been reported.
In a recent analyst report, Stifel wrote that “[d]espite macro pressures, demand for athletic/athleisure prevails globally and we anticipate retailers will focus open to buy dollars with winning brands.” That was borne out in Nike’s Q1 report, which recorded solid growth in future orders in most regions. China led the way again, with 22% growth in orders, but North America wasn’t far behind at 14%.
Even the U.S. Federal Reserve is wary of China’s slowdown, making a veiled reference to it in last week’s statement in which it held off on tightening monetary policy. At the ensuing press conference, Fed Chair Janet Yellen said “heightened concerns about growth in China and other emerging market economies have led to notable volatility in financial markets.
The Dow Jones industrial average has been grappling with both sides of the China question to close out this week. Thursday the index languished thanks in large part to a 6% slide from Caterpillar. The heavy equipment maker dropped after announcing a major restructuring that will cut 10,000 jobs in order to cut costs in the face of the global downturn in energy and mining. Friday morning the Dow got a lift from Nike’s 7% gain, contributing to opening gains of nearly 200 points.