Nike (NKE 0.03%) won't announce its fiscal first-quarter results until late September, but investors already have some valuable clues about what to expect in that report. Foot Locker (FL 1.74%), which counts the sports apparel titan as its biggest supplier, just issued an operating update ahead of its official quarterly announcement in late August.
The report showed a quick return to growth for the industry following the store closures that started in March. But there was some bad news around pricing and inventory that could mean profitability pressures ahead for Nike.
Strong demand trends
Foot Locker revealed that comparable-store sales returned to positive territory in May, June, and July. Comps were up roughly 18% in Q2, while they had plunged by over 40% during the most intense period of stay-at-home orders in March and April.
Management had plenty of positive things to say about industry demand, which was supported by federal economic stimulus efforts and robust e-commerce traffic.
"We saw a strong customer response to our assortments," CEO Richard Johnson said in a press release, "which we believe was aided by pent-up demand and the effect of fiscal stimulus." Most investors who follow the stock are expecting Nike to announce a similar, but less dramatic, rebound as sales declines improve to around 16% compared to 38% last quarter.
The bad news
Foot Locker's comments about its finances were less encouraging. The company is back to generating positive earnings, but excess inventory and rising costs associated with the shift toward e-commerce fulfillment are putting a strain on margins. Executives implied that retailers are cutting prices to try to work through that apparel and footwear overhang. "These undoubtedly remain challenging times," Johnson said.
The retailer, which gets over 70% of its supply from Nike, will announce its full results on Aug. 21, in a report that will show the exact scope of Foot Locker's declining gross and operating profit margins. The update will include inventory changes, too, which will be useful to watch heading into the holiday shopping season.
More of a marathon than a sprint
Nike has some assets that aren't available to Foot Locker, including a bigger online selling platform, a massive advertising budget, and a diverse network of retailing partners. Weaker profits at one of its major customers isn't necessarily a big problem for this blue chip business.
But Foot Locker's operating update suggests that the industry will be struggling under profitability pressures at least through the end of 2020. It also highlights major uncertainties around things like the back-to-school shopping season, professional sports plans, and additional stimulus legislation. Developments in any of these areas could harm growth prospects for industry retailers and their suppliers, and that's why Foot Locker is standing by its decision to avoid issuing a short-term sales forecast.
Those risks are all good reasons for investors to scale back their expectations for bullish comments from Nike's management team when the company announces its earnings update in late September. The company should show a solid growth rebound from the prior quarter. But it still could be several more quarters until the industry is back to its pre-COVID-19 patterns.