Nike Earnings Preview: China Slowdown And Gross Margins In Focus

– Nike releasing Q1 fiscal 13 earnings on 27th

– Weak demand in China and Western Europe can impact the top line growth

– Excessive discounts in Chinese markets can hit margins

– However, lesser marketing expense may increase the operating margins

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As sportswear giant Nike Inc. (NYSE:NKE) is scheduled to announce its Q1 fiscal 2013 results on September 27, ^[1] investors and analysts will be keenly watching the impact of weakening demand in China on the company’s top line growth. Additionally, after an increased promotional stance in China during the quarter, Nike’s margins will also be in focus this Thursday. Nike (NYSE:NKE) is the largest manufacturer of athletic footwear, apparel and equipment competing with other sports apparel retailers such as  Adidas AG (FRA:ADS), Puma (ETR:PUM), K-swiss Inc. (NASDAQ:KSWS) and Steven Madden (NASDAQ:SHOO).

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Weak demand in China can hit Nike

With the slowdown in the Chinese economy, consumer demand has declined sharply. The impact of weak consumer demand was quite evident for Nike in the last quarter as orders from China grew by a  meager 2% in Q4 fiscal 12, compared to a 20% growth in Q3 fiscal 12. As a result, Nike’s stock plummeted by nearly 10% after the Q4 earnings release, it’s biggest drop since December 2008.

As the Chinese economy continues to struggle with slow economic growth, analysts fear that Nike’s top line growth can be hit hard during the quarter. Additionally, the increased promotional stance of the company to clear off slow moving inventories can result in a decline in its gross margins. Nike is already facing headwinds such as higher input and transportation costs, and the high promotional stance in China can exacerbate the margin issues for Nike this quarter.

While we expect a decline in Nike’s gross margins on a q-o-q basis, we expect an improvement in Nike’s operating margins due to lower marketing expenses. Nike’s operating expenses had shot up in Q4 fiscal 12, primarily due to increase marketing expenses prior to Euro 2012 and London Olympics. As these expenses were one time expenses, we expect marketing expenses to decline, and thereby improve the company’s bottom line figures.

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1. Nike to announce Q1 fiscal 13 results on September 27, Source: Nike’s IR [↩]