Nike: sales stumble in North America as competition intensifies

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Ahead of its results this week, the big question for Nike investors concerned China.

Although the country accounted for just under a fifth of the sportswear giant’s sales in 2020, it was one of its most profitable markets. China generated almost half of group operating earnings in 2020. Sales then slumped during the pandemic and have been slow to recover. 

As it happens, Chinese shoppers are doing just fine. Instead, it is the sharp slowdown in North America — Nike’s biggest market — that has emerged as the bigger worry. Inflation-hit customers there have slammed the brakes on discretionary spending. Sales in North America rose just 5 per cent to $5.3bn in the fiscal fourth quarter that ended on May 31. That compares to growth of 27 per cent and 30 per cent recorded in the previous two quarters. 

Cost of sales is also rising faster than revenue. This, along with higher markdowns to clear inventory, squeezed margins and weighed on profits. Net income for the company fell 28 per cent year-on-year to $1bn during the quarter.

The pullback in spending comes as new entrants flood the footwear space. In its analysts’ call, Nike singled out the running shoe business as “a competitive battlefield”. Here is it is feeling the heat from upstart brands including Hoka. The chunky, colourful running shoes — prized for their comfort by fans and derided as an eyesore by others — pulled in $1.4bn in sales last year, according to owner Deckers Brand. That was a near 60 per cent jump.

Shares in Deckers have risen by a third so far this year. That compares with a 7 per cent decline for Nike. Nike shares, now down 38 per cent from its 2021 peaks, trades on about 30 times forward earnings, below its 3 and 5-year average.

This looks overdone. Expect the continued recovery in China, plus some tighter cost controls, to bring back Nike’s profit growth this fiscal year. Those who prize the long run should bet on Nike getting back on track.