Is Nike starting to lose steam in the race to dominate athletic apparel, or gearing up to pull ahead? Investors sent the sneaker giant’s shares down on Wednesday after it unveiled a mixed bag of indicators about its future performance.
Nike shares extended the fall they started on Tuesday after revealing quarterly sales that missed Wall Street’s estimates. During a subsequent call with analysts, executives said that Nike brand future orders were down 4 per cent, or 1 per cent on a constant currency basis, compared to the same time last year.
As investors parsed the results, they sent the company’s shares down more than 6 per cent on Wednesday.
The quarterly results underscore investors’ concerns that rivals like Adidas and Under Armour are gaining on Nike, a long-time leader in the market for trainers and athletic apparel. Future orders, meanwhile, give a hint at how the company’s performance may take shape over the upcoming months.
While acknowledging that futures “are an important part of our operating model,” Nike chief financial officer Andrew Campion told analysts that “futures growth is no longer a reliable proxy for revenue growth” for several reasons, including its current focus on increasing profitability, ramping up innovation both in terms of product offerings and its supply chain and improving digital platforms in order to pivot more quickly in response to rapidly shifting consumer taste.
Mr Campion said that the company is targeting “continued revenue growth across all geographies in fiscal year 2018″. That is expected to be fueled particularly by international markets like China, where the opportunity is “massive”, with the number of marathons growing 500 per cent over five years and a projected sports economy valued at $850bn by 2025, according to Nike brand president Trevor Edwards.
Some analysts agreed with Nike’s relative shrug-off of future orders in favour of focusing on its projected revenue growth.
Simeon Siegel of Instinet Equity Research said that “sales guidance has been a better approximator of actual sales growth” in all but a few recent quarters, noting that the spread between the 3 per cent sales growth in North America this quarter versus the 4 per cent decline in future orders from the previous quarter “represented the largest spread” between the two figures “in years.”
Jefferies equity analyst Randal Konik said that his team is “not concerned” about the futures orders figures “as the metric is increasingly less correlated with total growth”. With athletic and sporting-goods one of the few retail sectors to buck the general malaise infecting North American apparel companies, he added that Nike “remains in the best position to win” as it sees Adidas starting to cede market share in the running-shoes category to Nike.
Credit Suisse analysts said the tepid quarterly earnings suggested that “investment in brand building and innovation are taking longer to take hold than we had previously hoped.” Nevertheless, its investment strategy “supports our long-term thesis that Nike can return to high-single digit revenue growth and teens EPS (earnings per share) growth” as it starts to reap the benefits of a shift away from retail foot traffic and towards direct-to-consumer marketing and sales, which offer the potential for higher margins.