Nike Sales Fell 17% in China. Can the Company Make a Comeback?

SPEAKER_1 (0:00)

It's the Morning Drive. Nike reports earnings on Thursday. Tomorrow, investors are looking for signs that its turnaround is gaining traction. Sales in China fell 17% in the latest quarter, and the company is trying to rebuild its wholesale business and strengthen its product pipeline. Joining us is Josh Gilbert, who's the lead analyst for APAC, Asia Pacific, and the Middle East at eToro to look at what investors should watch from Nike's results. And whether the sportswear giant can get its business back on track. Josh, good of you to join us this morning.

Josh Gilbert (0:37)

Yeah, good morning. Great to be with you.

SPEAKER_1 (0:39)

Quickly, first of all, what are the key numbers investors are going to be watching when Nike reports their earnings?

Josh Gilbert (0:46)

Yeah, well, look, unfortunately, it's not been a very good few years for Nike. Shares down about 80% in the last five years. So the things that we're really looking at, you mentioned a couple there. Firstly, it's going to be China. We really want to see the bleeding, slowing down eight quarters of falling sales. We want to see nothing major. We don't want to see a huge turnaround story there, but just the slowing of the falling sales. We're going to be looking at margins. That's going to be really important.

For the quarter, about 42% is what we're looking at. So a small improvement, but that really goes to show us that ultimately, inventory levels are going to be lower and that they're ultimately not having to discount as much to get that inventory off the shelves and also wholesale. That's the clearest sign yet that the retail relationships are being repaired and really important to the overall turnaround story. And of course, as always, when it comes to earnings, we're looking at the outlook. We really want to hear from Nike that there is substance to what's next. And then they can actually start to deliver again with shares down so much over the last couple of years. We really want to hear a positive outlook and not another downgrade that we've had so many times over the last couple of years from Nike.

SPEAKER_1 (2:05)

Yeah, I mean, they've been beating earnings expectations. Shares around about, what, $36. So the market's still cautious.

Josh Gilbert (2:15)

It is. And look, I think when we look at those earnings expectations, they've been lowered a lot over the years. And it's the little details when it comes to earnings, because yes, it has been expectations many times over the last couple of years, but the share price has usually gone backwards when it's beaten. And that's because, as I say, estimates have been cut. So expectations are sort of very low. So yes, while it's beating expectations in the last five years, earnings have actually fallen 10%.

And so, we're not really looking at the headline numbers necessarily anymore. It's the little details that matter. As I say, the inventory levels, we're looking at margins, we're looking at those wholesale revenue numbers. Yes, okay, if we're beating on the top line in terms of revenue, that's great. But when we're thinking about where those expectations are coming from, they're coming from a much lower base. So investors' expectations are low, and therefore, they're not exactly being overjoyed or happy with what they're seeing from these results coming through, even though, as I say, they're beating expectations.

SPEAKER_1 (3:18)

China is clearly a major issue. So what's driving 17% decline in sales? Is it local competition?

Are Chinese consumers just losing interest in Western brands, do you think?

Josh Gilbert (3:35)

Honestly, I think it's both. Yeah, you hit the nail on the head. I think local competitors are massive. So we've got two of the big companies there, Anta and Li Ning. They really challenge on price, that local relevance, but also they've got that local distribution, which is obviously huge, especially in a country like China. They're really winning that fight as well.

Seeing locally is a bit more desirable. And I think broadly, not just in China, but obviously it's a big thing in China as well. But globally, you're seeing younger consumers really deciding if your brand is cool or not. And ultimately, in China, they're deciding that it isn't cool. And we're ultimately seeing that Nike is losing market share in the region. It has got its plan.

And that plan is to try and go deeper into local sports, into communities. And they're trying to design specifically for that market. So they're doing the right thing, but that's a multi-year plan. And it's going to take time and it's going to cost money before it actually comes back through the door. And that's really why we're seeing sales struggle so much in the region.