What happened?
Shares of Nike (NKE 1.74%) surged almost 12% in Wednesday morning trading, and are still up 10.2% at 12:23 p.m. EDT today following the release of the company's fiscal third-quarter results Tuesday afternoon.
So what
As expected, Nike's sales in China declined last quarter, falling about 4% after having increased by double digits every quarter for 5 1/2 years straight. Even with one of the company's best growth markets contracting in the quarter, Nike still reported solid overall results, with sales increasing 7% when adjusting for differences in currency exchange.
Image source: Getty Images.
In addition to reporting a good quarter that beat most expectations, management said that business is bouncing back in China more quickly than expected. CEO John Donahoe pointed out on the earnings call that traffic in its retail stores there (about 80% of which have reopened) have increased by double digits in recent weeks, and some stores have already returns to pre-COVID-19 levels. The company now expects that by the end of May, when its 2021 fiscal year ends, China will have returned to growth.
Now what
This is undoubtedly good news for Nike and shareholders, since the company counts on China as a key growth market for a business that's steadily become more reliant on international sales than its results in North America. But North America still accounts for almost 40% of the company's business, and there's still another shoe set to drop, with the efforts to slow the spread of COVID-19 in the U.S. only really kicking in over the past week.
All that is to say, today's big jump for Nike shares is nice, and investors should celebrate a little. It's nice to hear something good for a change. But we should also be very aware that once the economic data for the U.S. starts coming in over the next few weeks and months, the shares could get pummeled again.
That's not a call to sell Nike on today's pop, to be clear; just a warning that we are still in the midst of what could be the sharpest drop in economic activity in decades, and investors need to be clear-eyed about the likely continued volatility for stocks of companies selling items that people can do without.
At the same time, Nike is a timeless brand and has a fortress of a balance sheet with $3 billion in cash that will keep it afloat even if business falls off sharply. It's still a buy even after today's gains, with shares down 23% from the peak earlier this year. If shares were to fall further in the weeks and months ahead, investors would do well to load up on this "own forever" company.
