Sportswear giant Nike (NYSE:NKE) is scheduled to release its Q2 fiscal 2013 earnings on December 20. Investors and analysts will be closely watching the impact of slowing economic growth in China on Nike’s revenues. Additionally, a weak economy in Europe is likely to weigh on the company’s revenue growth from Western Europe as well. On the other hand, the strong results from North America are likely to continue to support Nike’s market position and the rapidly growing direct-to-consumer channel will complement Nike’s overall revenue growth.
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Consumer demand in China has declined due to a weakening economy. The company’s revenues from the region increased by just 2% in Q1 fiscal 2013 compared to 15% in the same quarter last year.  The Chinese economy continues to struggle as the GDP growth rate plummeted to 7.4% in the third quarter of 2012.  This value was the lowest over the last three years.  Lower spending from Chinese shoppers could be a drag on this quarter’s results.
Although revenues from China contribute only 10% to Nike’s overall revenues, the region provides huge potential due to a booming middle class and rising disposable income.  The slowing economy will only have a short-term impact and once the economy picks up, Nike’s substantial market presence in China will be a crucial factor behind its growth. The retailer entered China about 30 years ago and is currently the market leader in the region. 
However, in order to sustain its position, Nike needs to remain innovative and adaptive. According to the company, Chinese consumers are becoming more sophisticated and want innovative and specifically tailored products.  The retailer is taking the right steps to achieve this. Initiatives such as leveraging its brand strength in the 60-day festival of sports to better connect with customers, improving performance, style and fits in its apparel range and emphasizing on improving the productivity of Nike’s mono-brand stores will help the retailer. 
Western Europe Likely To Stay Weak
Growth in Western Europe revenues has been slow in comparison to Nike’s overall revenue growth. In the past three quarters, the region’s revenue growth was -5%, 4% and 7% respectively  compared to Nike’s overall revenue growth figures of 11%, 16% and 21%. Western Europe contributes about 20% to Nike’s overall revenues.
We believe that a weak economy in Europe is the main reason behind this slow growth. According to the United Nations, the aggregate GDP of Western Europe will shrink by 0.3% in 2012.  Hence, revenue growth from this region is likely to remain slow and is a trend we have seen with apparel retailers such as Abercrombie & Fitch (NYSE:ANF) and Guess (NYSE:GES). 
North America Will Remain Strong
North America contributes about 50% to Nike’s revenues and has been growing the fastest. In Q1 fiscal 2013, the retailer’s revenues from the region increased by 23% on top of 16% growth in the same quarter last year. Moreover, revenue growth has been strong and steady with the last two quarters of fiscal 2012 registering growth of 21% and 17%, respectively. This can be attributed to Nike’s strong brand recognition as the retailer has seen substantial growth across product segments. For instance, in Q1 fiscal 2013, revenues from footwear and apparel increased by 20% and 26%, respectively.  We expect good results from the North American region this quarter as well.
Direct-To-Consumer Business Driving Apparel Industry
Currently, the apparel industry in the U.S. is being driven in large part by the direct-to-consumer business with retailers such as Urban Outfitters (NASDAQ:URBN), American Eagle Outfitters (NYSE:AEO) and Gap (NYSE:GPS) registering substantial growth through this channel. Direct-to-consumer revenues for the three retailers increased by 36%, 28% and 23% respectively in their latest quarterly results. 
This channel has been growing rapidly for Nike as well with average growth of 20% in the past three quarters. The direct business accounted for about 20% of Nike’s overall revenues in Q1 fiscal 2013 compared to only 17% a year earlier.  The strong market presence and rapidly growing direct-to-consumer business will help drive Nike’s earnings this quarter.
Our price estimate for Nike at $109, implying a premium of about 15% to the market price.Notes:
- Nike’s SEC filings [↩] [↩] [↩] [↩]
- China’s economic growth slows to its lowest rate in more than three years, Daily Mail, Oct 18 2012 [↩] [↩]
- China’s middle class boom, CNN Money, June 26 2012 [↩]
- Nike’s Q1 fiscal 2013 earnings transcript, Sept 27 2012 [↩] [↩] [↩]
- World Economic Situation and Prospects 2012, UN, June 7 2012 [↩]
- Companies’ SEC filings [↩] [↩]