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Will Nike Shock Investors Again This Week?

By Demitri Kalogeropoulos – Jun 21, 2020 at 10:00AM

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They're bracing for an unusually rough earnings report from the footwear titan on Thursday.

Nike (NKE 2.77%) surprised investors in late March by revealing strong operating trends in China despite challenging financial headwinds brought on by store closures from the COVID-19 pandemic. The footwear and apparel giant maintained its connection with shoppers during February's lockdown conditions mainly thanks to its robust digital selling platform.

The next few months were even more challenging as store closures spread to Europe and the United States.

On Thursday, Nike will announce results for its fiscal fourth quarter that covers March, April, and May. That period coincides with maximum social-distancing efforts in major markets like the U.S. and Europe, and it is likely to show significant strain on its business.

Let's take a closer look at what investors should expect.

A woman jogs over a bridge at sunrise.

Image source: Getty Images.

About China

It's hard to overstate the importance of China to Nike's business. Sales there grew by 24% in the last full fiscal year, and the country was responsible for $1 billion of incremental sales gains. That's why investors celebrated the news that sales in China only shrank by 4% last quarter despite widespread store closures.

We'll learn on Thursday whether that positive momentum continued past late February and brought the market right back to growth. The digital business will be key, as that channel jumped 30% last quarter. Nike reopened all its stores in that country in the weeks that followed, too, which should help China start contributing to the business again.

The U.S. and Europe

Nike's positive early experience in places like China and South Korea gave management confidence to imagine a modest impact from the pandemic in bigger markets such as the U.S. and Europe. Growth was strong at home through late February, after all, with revenue growth slowing down only slightly to a 4% uptick.

CEO John Donahoe and his team were careful to note back in March that each market would react differently, so there's a wide range of potential sales trends that Nike could report on Thursday. Rival lululemon athletica (LULU 0.73%) only saw sales fall 17% through early May, for example, and it generated a profit even though earnings dived to $29 million from $97 million a year ago.

On the other hand, Under Armour (UA 1.52%) (UAA 1.08%) said in mid-May that sales collapsed by nearly 30% in North America through late March. That decline likely worsened in the weeks that followed. Most investors who follow Nike are expecting the company to straddle those two extremes, with sales falling 26% in the fiscal fourth quarter, to around $7.6 billion.

A new fiscal year

Its June earnings report is usually the time Nike offers a detailed outlook for the new fiscal year that has just started. Investors likely won't get any of the growth predictions they're used to seeing, though, considering the major risks still affecting the business today. Management might feel confident in a quick return to sales growth, but it will be hard to make a concrete projection there following an over 20% revenue slump.

Instead, look for Donahoe and his team to discuss how places like China and South Korea have rebounded as the COVID-19 threat faded, although localized outbreaks are still a problem. A similar trend for its other markets might get Nike right back to its growth footing before long.

Heading into this report, investors are expecting just such a rebound, with sales growth returning to around 8% in fiscal 2021 after posting a rare annual decline this year.

Demitrios Kalogeropoulos owns shares of Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of and recommends Lululemon Athletica, Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

Nike Stock Quote
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Under Armour (A Shares)
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Lululemon Athletica Stock Quote
Lululemon Athletica
$310.05 (0.73%) $2.25
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Under Armour (C Shares)
$6.69 (1.52%) $0.10

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