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Nike Inc.’s sales slump in China is capturing attention. But it’s the slowdown in North America that should worry investors.
The world’s largest sportswear company reported a 20% fall in sales, excluding currency movements, from greater China in the three months to May 31, as Covid-related disruptions affected 60% of its business in the country.
Even as Nike announced a new $18 billion four-year share buyback program, the company said it expected group sales to increase by a percentage in the low double-digits this year, and for its gross margin to be flat to down 0.5 percentage points, reflecting the impact of social restrictions in China.
The shares fell 2.5% in pre-market trading on Tuesday.
North American revenue unexpectedly fell by 5% in the company’s fiscal fourth quarter. Footwear sales fell by 6%, while sports apparel sales were down 5%. Although this compares with the period a year ago when sportswear sales were on a tear, the decline is worrying nonetheless, particularly as North America is Nike’s biggest market, with sales accounting for about 40% of total revenues in fiscal 2022.
The decline could reflect customers’ budgets being constrained by higher prices for food and fuel, as well as the absence of stimulus payments that swelled spending a year ago. It likely hasn’t been helped by the swing away from athleisure and back toward dressier outfits either.
Nike’s product stocks have also grown, by 23% to $8.4 billion at the end of May, elevated by goods still in transit. The company expects to discount more this fiscal year — bringing markdowns back to normal from their very low levels last year. But it is also preparing to increase prices by a mid-single-digit percentage.
Analysts at GlobalData suggest that some of the factors that boosted sneaker demand among younger shoppers, such as gains from cryptocurrencies and non-fungible tokens, may be starting to unwind. And Nike’s strategy to become a bling behemoth, through selling more directly to consumers and less through retailers such as Foot Locker Inc., may also be compounding the situation. Yet pursuing the luxury strategy is the right one. When products are only available from Nike’s stores, website or app, there’s no risk they might be available elsewhere at a discount.