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How Nike Plans to Leave Coronavirus in the Dust

By Dan Caplinger - Mar 28, 2020 at 12:26PM

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The athletic giant sees itself as a long-term winner despite the pandemic.

The novel coronavirus pandemic has sent a shockwave across the globe, and people have changed the way they live in an attempt to fight the disease. That's leaving companies scurrying to adapt to the new environment, and sellers of consumer goods face particularly difficult challenges. Yet Nike (NKE -2.43%) has been the leader of the athletic apparel industry for decades, and despite the fact that investors haven't been entirely confident about how the shoe giant would navigate the current crisis, it's been able to get through tough times in the past.

Coming into Wednesday's fiscal third-quarter financial report from Nike, investors were optimistic that the company's results would be solid, but they worried that going forward, things might be more problematic. Nike admitted that the future is uncertain, but it stands ready to do whatever it takes to preserve the power of its brand and keep customers around the world buying its products.

Exterior of Nike Women retail store, with front window display of shirts and shoes.

Image source: Nike.

Nike's running a strong race

Nike's fiscal third-quarter report showed continued efforts to produce growth. Revenue rose 5% to $10.1 billion, which was better than most investors had expected. Similarly, although net income was down 23% to $847 million due largely to a one-time charge, adjusted earnings of $0.78 per share easily topped the $0.59 per share that most of those following the stock were looking to see.

Looking more closely at the numbers, Nike attributed much of its success to double-digit percentage growth in its Nike Direct business. Results for the company's Converse brand outpaced its core Nike brand segment, with strong gains in Europe supplementing digital sales globally. Nike pointed to higher sales of sportswear and Jordan-brand products, as well as continued growth in several areas of the footwear and apparel segments.

Yet the coronavirus did have an impact on Nike. Gross margin was down, largely because reduced sales from its Greater China region cut off a key source of high-margin business for the athletic giant. Tariffs also had a negative impact by adding to costs of imported goods to North America. Inventory levels companywide were up 7%, and Nike called out a rise in China inventories due to suspended sales resulting from coronavirus-related lockdowns.

CEO John Donahoe tried to keep the mood upbeat. "In an extraordinarily dynamic time," Donahoe said, "Nike's strong results are testament to our deep consumer connections, compelling product innovation, and agile teams around the world." The CEO noted that the strength of the Nike brand should help it recover quickly once stores reopen following temporary coronavirus-related closures.

What's ahead for Nike?

With the fiscal third quarter having run only until the end of February, Nike's numbers didn't reflect the greater impact of coronavirus closures on stores outside China. Those declines are yet to come, and it'll be essential for Nike to replace at least some of those store-based retail sales through its direct channel in order to hold up as well as possible. Donahoe said during the quarterly conference call following the release of earnings results that Nike's efforts to connect with customers via its e-commerce app led to a more-than-30% growth rate digitally in China and helped the company offset the impact of store closures. That model could work well throughout the rest of the world in the fiscal fourth quarter.

Admittedly, Nike can't be sure exactly how the situation will play out in other parts of the globe. The company's positive experiences in China, Japan, and South Korea will guide its strategic vision for handling markets in Europe and the Americas, but Donahoe wouldn't speculate on a time frame for containment-based store closures.

Nike shareholders were ecstatic about the results, pushing the stock higher by more than 10% immediately following the announcement. Not every consumer goods giant will be able to follow the same game plan that Nike's put together for its business, but the efforts to support its global brand will be critical as the company plans for its long-term future beyond the immediate effects of the coronavirus pandemic.

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