Is Nike Rebounding in China?

After employing a "reset" strategy Nike is starting to show signs of life in Greater China, but its future orders have some investors concerned. What lays ahead for Nike?

Apr 30, 2014 at 9:00AM

After its China sales declined for three consecutive quarters (the third quarter of 2013 through the first quarter of 2014), Nike (NYSE:NKE) began to turn things around in the second quarter of 2014. The growth continued in the third quarter, although future orders declined 1%, which left some doubt about whether or not Nike had really regained its footing.

China

Breaking China down
Sales in Greater China, which also includes Taiwan, Hong Kong and Macau, increased to $697 million for a 9% increase over the third quarter of 2013 (and a 10.8% increase from the second quarter of 2014). During the third quarter, footwear led the way, growing 14% over the third-quarter 2013 number (30% from the second quarter of 2014). Apparel stayed flat in comparison with the third-quarter 2013 figure (-19% from the second quarter of 2014), while equipment dropped 3% from the third quarter of 2013 (+19% from the second quarter of 2014).

If you compare the first three quarters of 2014 to the first three quarters of 2013, footwear increased 7% (and 5% excluding currency changes), apparel gained 5% (and 3% excluding currency changes), and equipment fell -8% (and -11% currency-neutral).

The bottom line: Nike's footwear sales have been steadily working their way up, but apparel and equipment still have a ways to go. Fortunately for Nike, footwear makes up 67% of its China sales. As another bright spot, Nike's own retail stores in Greater China have increased their same-store sales by at least 20% in each of the past two quarters.

China as percentage of Nike's total sales
The China division accounts for 10.6% of the Nike brand's overall revenue (excluding Converse brand sales and Corporate revenues). By comparison, the leading North America division generates 46.8% of Nike's revenue and Western Europe produces 19.7%. Sales in emerging markets, including Brazil, comprise 14.2% of Nike sales.

Nike generates over 50% of its revenue beyond North America, a sharp contrast with upstart Under Armour (NYSE:UA), which brings in less than 8% of its $2.3 billion revenue from international markets. Nike's main competitor Adidas (NASDAQOTH:ADDYY) generates 12% of its net sales in the Greater China market; the company reported revenue of $1.66 billion euros for a 7% increase over its 2012 sales (currency-neutral).

Nike has room to grow
According to a recent report by Research and Markets, the Chinese footwear athletic market is projected to grow at a 9.5% compound annual growth rate, or CAGR, until 2018. China already has the largest athletic footwear market in the world due to its large population and the rising incomes in the country over the last five years. However, international sellers like Nike and Adidas account for only 20% of revenue in the highly competitive marketplace. Nike (including the Nike, Jordan and Converse brands) has about a 60% share of that 20% -- or 12% of the total China market.

This means that the footwear leader has plenty of room to grow. Beyond Adidas, most of the competition comes from China-based companies, including Li Ning Company, ANTA Sports Products and 361 Degrees International. Plus, both Adidas and upstart Under Armour have launched recent initiatives in China around high-concept retail stores, which could put further pressure on Nike sales.

Concerns about the immediate future
Two primary concerns spooked investors, which caused the recent price drop for Nike. First, Nike warned about near-term earnings declining due to currency headwinds and a drop in future orders in Greater China. Future orders dropped 3% from the same quarter of 2013. This followed a 4% increase for future orders during the second quarter.

A Fool's summary
So far the jury is still out on whether or not Nike's "reset" strategy in China has succeeded. Positive indicators have definitely appeared -- like increasing footwear revenues and growing same-store sales that point in that direction -- but for the sportswear giant to gain back some investor confidence, it needs to sustain this progress over more than a few quarters. 

If the earnings and currency warnings do come to fruition, look for the stock to trade down or in a narrow range for the next few quarters, as short-term holders bail out based on any bad news. However, long-term holders who stay put should see rewards as Nike's fundamentals remain strong -- and it has proven in the past that it can weather short-term challenges like currency headwinds and figure out challenging marketplaces.

3 stocks poised to help you retire rich
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

Chris Brantley has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers