Shares of Nike (NKE +2.87%) and Foot Locker (FL +0.00%) have sold off along with the broad market as COVID-19 continues to spread worldwide. Companies from various sectors are expecting reduced revenue in the first half of the year.
Now, after the NBA announced the suspension of its upcoming season, what could this shutdown mean for the two sneaker companies?
Image source: Nike.
A tough decision from the NBA
After Utah Jazz stars Rudy Gobert and Donovan Mitchell both tested positive for COVID-19, the NBA announced the suspension of its regular season on March 11. NBA commissioner Adam Silver anticipates that the hiatus will last at least 30 days.
Nike's basketball-related products comprise a sizable portion of revenue and are important to its growth. The Nike basketball brand made up 5% of fiscal 2019 wholesale revenue, and the Jordan brand accounted for 10% of revenue during the same period.
The weaker demand at Nike will only trickle down to specialty retailer Foot Locker, as the former accounted for two-thirds of Foot Locker's merchandise in 2018.
However, Nike appears to be handling the headwinds well. On March 24, the company reported fiscal third-quarter revenue that was up 5% year over year to $10.1 billion, topping analysts' consensus expectation. For the period ending Feb. 29, Nike cited strength in digital, Europe, and North America, offset by weaker sales in China. Although Nike declined to offer fourth-quarter and full-year guidance, CFO Andy Campion expressed some optimism about any recovery from the COVID-19 outbreak:
[W]e are confident that executing our operational plan will position Nike for a return to profitable, capital efficient growth. That will happen over time as each country addresses COVID-19 at a different pace, but our confidence in the return to growth is founded on the relatively rapid recovery and early signs of normalization we are already seeing in China, Korea, and Japan.
On March 17, Foot Locker announced the temporary closure of its stores in North America, EMEA (Europe, Middle East, and Africa), and Malaysia through March 31. The retailer also withdrew the full-year 2020 guidance that it issued during its Feb. 28 earnings call. Investors will have to wait until the company reports its first-quarter results before management offers more clarity for the current year.
What next?
Nike is the NBA's exclusive apparel provider. For some historic perspective, the 1998 NBA lockout resulted in a major hit to sales of basketball shoes in the U.S. That lockout lasted over six months, and sales of U.S. basketball shoes declined 25% during the fourth quarter that year. Retailers blamed the lockout for a drastic weakening of traffic too.
While it's uncertain how long the NBA season will be postponed this year, ESPN sees a "best-case scenario" if the season returns by June. While this is still several months of lost viewership and revenue, the suspension might not spill into the important back-to-school and holiday shopping seasons.
Another basketball-related headwind for Nike and Foot Locker was the NCAA's decision to cancel championship events for basketball and other spring sports due to the outbreak. March Madness tends to draw huge audiences, further boosting sales of athletic merchandise.
Diminishing consumer confidence and uncertainty around the effects COVID-19 will have on the economy will translate into weak spending at Nike and Foot Locker too. Discretionary goods like sports apparel and shoes will certainly take a hit as fears of a recession make headlines. Even if the U.S. manages to contain the outbreak sooner than expected, there's no telling how long it will take before consumers resume their normal spending habits.
While Nike and Foot Locker's businesses will suffer over the next few quarters from the ripple effects of the pandemic, the NBA shutdown, and consumer anxiety, they can rebound once the outbreak is contained. Nike's strong results in the latest quarter despite widespread closures in China and parts of Asia demonstrate the resilience of its brand in the face of challenging headwinds. The NBA games will return eventually, and there may even be pent-up demand for the two companies' products if consumers take a little breather from shopping.
