Athletic footwear and apparel giant Nike Inc. reported first-quarter results Tuesday that left market watchers with a mixed bag to unscramble.
The Beaverton, Ore.-based athletic firm produced Q1 sales and profit that handily topped forecasts, but its decelerating futures orders — a measure of overall retail demand and a gauge for future sales — stoked analysts’ fear that the firm is losing its edge in the athletic market.
The company said worldwide futures orders were up 5 percent and 7 percent excluding currency changes — missing forecasts for growth of 8 percent. Future orders in North America also grew just 1 percent, while estimates predicted growth of 4 percent.
Those results drove the firm’s shares down more than 4 percent in after-market trading Tuesday, and the stock remained in the red as of 1:10 p.m. ET today, down 3.7 percent, to $53.30.
Here, we round up the three biggest factors hurting Nike’s business right now.
Ahead of Nike’s Q1 report, analysts had been growing increasingly concerned about how the brand would fare amid rapidly rising competition from Under Armour and Adidas.
For many sidelined market watchers, the slowing growth in futures confirmed what they had been thinking for the last few months.
“The disconcerting surprise within futures was North America futures up a paltry 1 percent versus our 4 percent estimate likely a result of the competitive landscape shifting toward Adidas and UA,” Canaccord Genuity Inc. analyst Camilo Lyon wrote today. “Given the moderating futures, we are hard pressed to see how Nike will realize that level of acceleration given the intensifying competitive landscape … Nike is having to navigate an environment it has not seen for years, one in which consumer preferences are shifting elsewhere and which likely does not change course for the foreseeable next 6-9 months.”
The North American Challenge
The North American markets have been a tough sell for athletic brands lately. And while Nike saw an improvement — advancing 6 percent in the region this quarter — Cowen and Co. analyst John Kernan noted the significant difference between Nike’s North American sales growth and Adidas’s recent North American boom.
“Although Nike reported 6 percent growth in its key North American market, [our] top pick Adidas has grown its North American brand sales up 31 percent in the first half of 2016 and continues to take market share,” Kernan wrote. “Nike North American futures only increased 1 percent — its worst rate in over 6 years.”
Kernan added that “clear weakness in North American demand from wholesale partners” is only made worse by other issues in the region, such as store closures, uneven traffic and “structural declines in open to buy dollars across brick-and-mortar retail.”
For her part, Citi Research analyst Kate McShane acknowledged that Nike posted week futures growth in North America but said she was encouraged by the firm’s guidance.
Nike CFO and EVP Andrew Campion said reiterated the firm’s revenue outlook but said he now expected gross margin to contract by approximately 125 basis points.
“We were encouraged by management’s guidance that reported revenues should outpace futures on stronger sell-throughs (higher quality) and that they remain confident in their long-term FY20 target of high-single-digit annual domestic growth,” McShane wrote Tuesday, adding that she expects solid growth in international markets such as China, Japan and Europe to boost business.
Product Newness & Slumping Basketball
While Nike has a large mass of products in its arsenal, some experts warn that consumers are craving more newness from the company. Adding to those concerns is a looming question about whether Nike’s former goldmine — the basketball category — is officially on the downturn.
In a Sept. 23 note, Lyon said he didn’t believe that Nike could land increased shelf space allocation due to a “lack of exciting new product.” Meanwhile, he found that the firm’s decision to reduce prices of signature basketball product were unlikely to reap benefits.
“Nike’s action to reduce pricing on LeBron and KD by 12-15 percent speaks volumes to the intensifying landscape,” Lyon writes. “While it seems like the price cuts coupled with LeBron James winning the NBA championship have helped demand to some degree, we believe Signature basketball continues to trend negatively.”