What's going on?
Nike, the world’s biggest sportswear maker, reported a better-than-expected profit on Tuesday – but investors appear to have other concerns…
What does this mean?
While Nike’s profit in its latest quarter exceeded the forecasts of research analysts, it was still 24% lower than the same period last year (yep, analysts weren’t expecting much!). Also, aggressive cost cutting helped achieve those profits, which are initiatives that Nike can’t implement again and again.
One big problem comes from North America, where sales are declining; this is partially offset by growing sales internationally, particularly in China. But, overall, Nike’s revenue has stopped growing – which is a problem. One other problem for investors is that Nike says it expects its profitability (a.k.a. margins) to continue to decline later this year.
Why should I care?
For the stock: Nike is a company in transition, trying to make itself more self-sufficient.
One of Nike’s key strategies for the future is to cut out middleman retailers and sell more of its products directly to consumers through both its own Nike stores and its own website or app. The transition presents a big opportunity for Nike (and other brands) as it might allow them to sell their products more profitably. However, Nike still relies on third-party retailers for 75% of its sales, and shifting away from that reliance also poses significant risks.
For markets: As Nike increasingly sells directly to its customers, sportswear retail shops are vulnerable.
Nike’s increasing focus on direct-to-consumer sales is a threat to the retail shops currently selling Nike’s products. For example, Finish Line and Foot Locker depend on Nike for about 70% of their sales. These and other sportswear retailers have recently reported weaker revenues and slashed their forecasts for the next few months.