It isn't easy to choose great, enduring companies. But as investors, this is what we should always aim to do. As the COVID-19 pandemic rages throughout the world, stock markets have seen one of the swiftest crashes in recent history. During such turbulent and uncertain times, it makes sense to look for companies that have rock-solid financials and strong franchises.
The recent crash has thrown up a whole plethora of investment opportunities. Many companies have seen their share prices falling to lows not seen in the last two to three years. Yet there have been companies that are resilient to the pandemic or may even have benefited from it (think videoconferencing, as more people are now working from home than ever). The trick, therefore, is to find a growth stock that has a strong, durable franchise but has also suffered temporary but severe negative effects as a result of the pandemic.
A company with this unique combination of factors is Nike (NKE 0.19%). This shoe and sports apparel manufacturer and retailer represents the single most compelling investment proposition among the many choices out there.
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China crisis, widespread store closures, and severe disruption
Trouble first started with the coronavirus outbreak in China, which forced Nike to temporarily close half of its Chinese stores in early February. Stores that did remain open were operating with reduced hours and experiencing lower-than-planned retail traffic. The company expected this situation to have a material effect on Greater China's operations but did report one mitigating factor -- its digital commerce business continued to stay strong despite the tough conditions imposed by the Chinese Government.
While China has largely recovered from COVID-19, the outbreak has now spread like wildfire across the rest of the world. This has affected Nike's business globally, and after the end of the third quarter of the fiscal year 2020 (which ended in February 2020), nearly all Nike-owned stores outside of China and South Korea had been closed.
Not only have Nike-owned stores been temporarily shuttered, but the company's wholesale partners have also either had store closures themselves or reduced operating hours. Nike's distribution centers and third-party manufacturing partners have also been adversely affected due to labor shortages, facility closures, and changes in operating procedures related to safe distancing measures.
These problems have been made more acute by the fact that there is no target reopening date for these closed stores. Neither is there any playbook to rely on for when economic conditions go back to normalcy (i.e., when the lockdown will officially be lifted).
Strong franchise and innovative brand
Despite the above challenges, my view is that Nike continues to remain a dominant brand with a strong brand franchise. It remains one of the top apparel brands when compared to its peers. Nike's footwear innovation also enables it to introduce new shoe technology for Olympic athletes -- for this year, it was supposed to be the Vaporfly and Alphafly that supposedly work so well that some argue they create a mechanical advantage.
John Donahoe, CEO of Nike, has also described in the company's recent conference call how Nike continues to engage consumers even through store closures and lockdowns. Its digital app ecosystem continues to support customers and engage them even while they stay home, and weekly active users for all Nike activity apps were up 80% by the end of the third quarter.
Another indication that Nike can recover swiftly from the pandemic is the company's reopening of its stores in China. As of March 24, nearly 80% of stores in China have reopened and are seeing double-digit increases in retail traffic week over week. Some stores have even reported sales returning to the prior year, pre-pandemic levels.
These observations show that there is pent-up demand for Nike's products even though its stores are closed, and point to a strong recovery once the stores are allowed to reopen globally.
A once-in-a-blue-moon opportunity
Investors should take the short-term bad news in stride. After all, Nike is not the only major brand suffering from worldwide store closures. However, it should be acknowledged that the company is much better positioned to recover from the pandemic compared to smaller and weaker peers.
The expected weakness in revenue and profits during Nike's upcoming fourth-quarter earnings report represents a once-in-a-blue-moon opportunity to accumulate more shares of Nike, as this pandemic should be viewed as a temporary setback for the company.
