What To Expect From Nike’s Fourth Quarter Earnings

by Trefis Team
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Nike (NYSE:NKE) is all set to report its full year earnings for FY 2017 on 29 June. The company has seen some tough times in the year so far. Growth in the U.S. has slowed down dramatically in the recent past, while Nike faces rising pressure from rivals such as  Adidas and Under Armour, especially in the footwear business. Growth in the U.S., over the first nine months of the year, has been around 4%, in comparison to nearly 10% in the same period last year. That said, overall growth has not been hurt much on the back of Nike’s strong presence in international markets. Gains made in China and Europe have managed to offset the losses domestically by a large margin.

Going forward, we can expect to see things turn around in the short term as inventories and demand finally seem to be back in line.

U.S. Apparel Trend To Improve in the Short-Term

As mentioned previously, Nike has been hurt by the slowing apparel industry in the U.S. in the recent past. The slump is mainly attributable to a sudden and dramatic shift in the way that customers shop for shoes and apparel nowadays. In general, a significantly larger number of people are buying online than from brick-and-mortar stores. Apart from the falling revenues, the unanticipated shift to e-commerce has greatly hurt profit margins over the past few quarters. This is primarily because retailers were forced to rely on heavy discounting to clear out the slow moving inventory.

However, the good news is that unlike Under Armour, Nike gets a large proportion of its revenues from outside the U.S. market, where e-commerce is a smaller factor. This helped the company offset the slowing growth domestically, ergo, not facing the dramatic slump in profits and revenues witnessed at companies like Under Armour.

Further, inventory levels fell by almost 8% in the previous quarter. Hence, over the short term, we can expect the profitability in the U.S. geography to bounce back quickly since inventory levels are better matching the demand. This leaner retailing position could help boost profits as early as the fourth quarter.

In the meanwhile, any improvement over the previous quarter’s 3% revenue growth pace, would confirm that operating trends have stabilized in the company’s most important market.

Could Get More Clarity on the “Triple Double” Strategy

In the previous quarter, Nike’s CEO Mark Parker laid out three important strategies for future growth, in what he dubbed the “triple double.” Essentially, the management has made it clear that aligning all its firepower against the consumer experience is the key to long term growth. To meet consumers rising expectations, the company is driving core changes in three fundamental areas of the business: innovation, supply chain, and direct interaction with customers.

Basically, the company hopes to double its momentum and scale of innovation through performance and sports style, double the speed from product insight to delivery in the market place, and double its direct connections with consumers through digital membership and personalization.

We can hope to learn more about this strategy, while gaining more clarity on its effectiveness, in the coming earnings call.

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