Nike (NKE 1.47%) is growing sales in every region of the world, but China is by far Nike's most important growth opportunity. "China" was mentioned 49 times in Nike's 2015 10-K for the fiscal year ended May 31. It's no surprise, since the country was its highest-growth region during the year, with sales up nearly 20% over FY 2014. It was clear in the Q1 earnings released on Sept. 24, China is becoming an even more important part of Nike's global profile.
Nike crushes Q1 earnings
Following a very impressive FY 2015, Nike's first quarter showed that the company isn't slowing down. Though sales grew only 5% during Q1 year over year, net income jumped 23%. Worldwide future orders were up 9% year over year, 18% if adjusted for currency fluctuations during that time.
Nike performed well in nearly every region of the world, but the big story is Nike's surge in China. Some of the impressive results from Nike's Chinese operations during the quarter include:
- Sales up 30% year over year.
- Footwear segment sales up 36% year over year, compared with 20% YoY footwear sales growth in FY 2015.
- Direct-to-consumer sales up 46%, as the company focuses on online and Nike Brand Store growth.
- EBIT up more than 50% because of higher margins on higher-priced goods and improved expense management.
Why Nike isn't worried about China's economic woes
Analysts have been harping on China's slowing economic growth for a few years now. It was only five years ago that China's GDP was still growing in the double digits each year, but now that total economic growth has slowed to an expected 7% this year, there are more concerns about what the slowing economy, volatile stock market, and changing business landscape will mean to U.S. companies doing business in China.
But Nike's executives are unfazed. During the company's recent post-earnings conference call, Nike's CFO, Andy Campion said "While we're very mindful of the macroeconomic volatility in China, our brand has never been stronger and our marketplace has never been more healthy."
That's because Nike's incredible opportunity in China comes from the country's rapidly growing middle class. According to research by ANZ economists, 326 million Chinese citizens will rise into the middle class between 2014 and 2030. That's roughly the population of the United States that's entering the middle class in less than two decades, and that's now the target demographic for Nike.
Nike has an estimated 12% share of the total athletic wear market in China, up from an estimated 11% last year. Expect that percentage to continue increasing as Nike takes advantage of the rising popularity of basketball in China. With a rapidly growing total market size, coupled with a growing share of that market, Nike's strong sales growth in China is likely to continue well beyond 2015.
According to NBA statistics released earlier this year, 300 million people in China play basketball. That's slightly less than the entire U.S. population, and basketball's presence in China is growing rapidly. The NBA is going to host two preseason games in China this year, including the Los Angeles Clippers vs. the Charlotte Hornets on Oct. 11.
Nike is taking advantage of its dominant basketball brand position by bringing its sponsored athletes to China to be the basketball brand ambassadors. During the recent quarter, Nike sponsored basketball players such as Lebron James, Kobe Bryant, Anthony Davis, and Paul George all participated in Nike basketball events throughout China. On Sept. 21, Nike announced that Michael Jordan will make an appearance in Shanghai in October to celebrate the Air Jordan brand's 30th anniversary.
Nike Brand President Trevor Edwards said, "All told, the incredible growth we saw in China this quarter reflects our ongoing efforts to align the marketplace to the category offense, a strategy that we expect will drive growth in this critical geography for many years to come." Nike has clearly made an impression in China, and expect sales growth there to be a big part of Nike's story going forward.