Nike (NYSE:NKE) can keep growing even through significant retail disruptions caused by the COVID-19 pandemic and related containment measures. That was the main takeaway from the footwear and apparel giant's fiscal third-quarter results, which showed healthy sales gains through late February.
That period didn't include any of the economic slump that started in the U.S. in March, but Nike sees a path toward a quick rebound. CEO John Donahoe and his team discussed their reasons for optimism in a conference call with Wall Street analysts, and below we'll look at a few highlights.
Getting back to growth in China
We had closed more than 5,000 stores in China while the remaining open doors were operating with severely reduced hours. Not surprisingly, retail volume ... plummeted. But we acted quickly and decisively, leveraging our diverse sourcing base and digital capabilities to manage the business with flexibility and shifting our inventory to serve consumer digital demand.
China is crucially important for Nike, having delivered $1 billion of incremental revenue growth in its last full fiscal year. That's why investors were worried that the coronavirus spread and subsequent retail closures might extract a huge price in lost sales.
Things weren't nearly as bad as Wall Street had feared. In fact, sales declined just 4% in the country as many consumers continued to shop, only online instead of in stores. A spike of more than 30% in digital orders preserved much of Nike's momentum in China, and executives said the country is making big strides back toward normal, with double-digit customer traffic growth. Some locations have already returned to normal retailing volumes, too.
The three-step recovery process
We see each of our markets progressing through a time series that begins with the country addressing the COVID-19 outbreak followed by three phases from a business perspective; one, a recovery period, including, for example, the ramp-up of store reopenings; two, a period of normalization across consumer demand and supply; and three, a period in which we return to strong growth.
-- CFO Andy Campion
China's trends, plus experience in South Korea and Japan, provide a blueprint for how Nike can manage through the staggered outbreaks across different markets, with current spikes occurring in parts of Europe and the U.S.
Management's big-picture approach involves taking aggressive early measures to protect worker and shopper safety, including by temporarily closing stores. That move is paired with heavy promotion of its digital ecosystem. It just announced free training classes online, for example. Finally, the company steadily resumes its retailing operations with the aim to return to normal in a period of weeks. "We're seeing the other side of the crisis in China," Donahoe said, "and ... we now have a playbook that we can use elsewhere."
Entering an uncertain time in the U.S. market
We will not be providing financial guidance for Q4 due to the uncertainty resulting from the spread of COVID-19. For [the] fiscal year we had been planning performance in line with our long-term financial model, but [the] year-over-year growth rate-based comparisons will no longer be meaningful.
The virus will impact different countries in different ways, and the U.S. market is now in the early stages of retailing shutdowns and maximum containment efforts. That pause adds lots of uncertainty to Nike's outlook, even though the market had posted healthy growth right up through late February.
The fiscal fourth quarter will almost certainly include shrinking sales in this key geography. If trends follow other big markets, like China, then that slump might be modest -- and followed by a quick step back toward normal sales trends.