North America Lifts Nike Despite Weak Europe And China Results

Nike‘s (NYSE:NKE) recently released Q2 fiscal 2013 results reflect economic weakness in China and Western Europe. However, the weak results in these geographies were offset by the retailer’s continued strong performance in North America. ^[1] Moreover, the rapidly growing direct-to-consumer business also helped the results.

Nike’s growth in Western Europe is likely to suffer for next few quarters until the economy picks up. In China, the company is taking some important steps to fight off the weak economic environment and better understand the tastes of China’s shoppers. ^[2]

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Strength In North America Continues

North America is the most important market for Nike, generating around 50% of its annual revenues. ^[3] Revenues from this region have registered a substantial growth in the last four quarters, ranging between 10% and 17%. ^[3] This growth is impressive given that Nike already has a large presence here.

Nike’s continued good performance in North America can be attributed to its strong brand recognition as nearly every category including running, basketball and men’s training footwear and apparel, witnessed double-digit growth. ^[1] Nike’s innovations such as Flyknit, FuelBand, Pro Combat, Lunar and Free have further strengthened the customers’ confidence in Nike brand sportswear. ^[1] While Flyknit provides extra cushion in sports shoes, FuelBand tracks daily physical activities of the user and Pro Combat provides light weight armor for American football players.

The past trends, Nike’s brand recognition and its constant efforts to improve the products point towards a bright future for the company in North America.

Nike Can Do Better In China Once The Economy Picks Up

China contributes only about 10% to Nike’s overall revenues currently. ^[3] However, the region provides huge market potential due to its enormous population, booming middle class and rising disposable income. ^[4] Lately, the economic growth in the region has been slow. In the third quarter of 2012, it plummeted to its lowest value over the last three years. The weak economic environment and adapting to the Chinese customers’ tastes has been a bottleneck for Nike.

In Q2 fiscal 2012, Nike’s revenues declined by 11% as compared to an increase of 35% in the same quarter last year. ^[3] However, the revenues for previous three quarters increased by 2%, 8% and 25% respectively indicating that the recent economic slump was the main reason behind the slow growth in Q2. Moreover, the retailer stated that the excess inventory also led to revenue decline.

Going forward, once the economy picks up, Nike’s substantial market presence in China will be a crucial factor behind its growth. The retailer entered China about 30 years ago and is currently the market leader in the region. ^[2] To sustain its leadership, Nike needs to adapt its products to align them with the needs of the Chinese buyers.

According to Nike, Chinese consumers are becoming more sophisticated and want innovative and specifically tailored products. ^[2] The retailer is taking the right steps to achieve this. Initiatives such as leveraging its brand strength in the 60-day festival of sports to better connect with customers, improving performance, style and fits in its apparel range and emphasizing on improving the productivity of Nike’s branded stores will help the retailer. ^[2]

Direct-To-Consumer Business Growing Rapidly

For Nike, as well as for the apparel industry in the U.S., the direct-to-consumer business is growing rapidly. For instance, apparel retailers such as Urban Outfitters (NASDAQ:URBN), American Eagle Outfitters (NYSE:AEO) and Gap (NYSE:GPS) have registered substantial growth through this channel. Direct-to-consumer revenues for the three retailers increased by 36%, 28% and 23% respectively in their latest quarterly results. ^[5].

For the past three quarters, from Q3 fiscal 2012 to Q1 fiscal 2013, Nike’s direct-to-consumer revenues have increased by 20% on average. ^[3] Even in this quarter, the growth continued and further increased to 27%. ^[3] Moreover, the direct business accounted for about 20% of Nike’s overall revenues in Q1 fiscal 2013 compared to only 17% a year earlier. ^[3] With the increasing contribution and faster growth, the direct-to-consumer channel can boost Nike’s revenues.

We are updating our price estimate for Nike which is currently $110, implying a premium of about 15% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Nike’s Q2 fiscal 2013 earnings transcript, Dec 20 2012 [↩] [↩] [↩]
2. Nike’s Q1 fiscal 2013 earnings transcript, Sept 27 2012 [↩] [↩] [↩] [↩]
3. Nike’s SEC filings [↩] [↩] [↩] [↩] [↩] [↩] [↩]
4. China’s Middle Class Boom, CNN Money, June 26 2012 [↩]
5. Companies’ SEC filings [↩]