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Waiting for NIKE, Inc. (NKE)’s China Growth Story

NIKE, Inc. (NYSE:NKE)The world’s leading sports goods company NIKE, Inc. (NYSE:NKE) recently released quarterly results that topped analysts’ estimates. But the company is now expecting a decline in China in the next two quarters, and it has lowered its annual revenue and income estimates. NIKE, Inc. (NYSE:NKE)’s strengths come from good revenue and income growth, reasonable fundamentals and a stock that has outperformed the S&P 500 this year. But its current results were a mixed bag as despite reporting several key improvements, it continues to face the old challenges as the much awaited Chinese turnaround still eludes its investors.

The company has now reduced its revenue guidance for the year ending in May from as much as a low-double-digit growth to a high-single-digit number. Similarly, earnings forecasts have now been reduced from mid-teens growth to low-double-digit percentage growth.

Quarterly performance

Overall, NIKE, Inc. (NYSE:NKE) reported a decent quarterly performance on the back of strong demand for running shoes and basketball gear in North America in general and in the U.S in particular. The company’s profit rose 22% to $668 million or $0.76 per share, which was $0.02 above analysts’ estimates compiled by Bloomberg. However, the future orders for NIKE, Inc. (NYSE:NKE)’s brand, excluding foreign-currency effects, rose 8%, below market expectations of 8.8%.

Nike’s stock has risen by 5% this year, easily outperforming S&P 500 ETF (SPY), which is up 19% in the corresponding period, but trailing Deckers Outdoor Corp (NASDAQ:DECK), which is up by an impressive 46.7% this year.

Turnaround stock?

Deckers Outdoor Corp (NASDAQ:DECK) was one of the most heavily shorted stocks, but its short interest has now fallen dramatically to below 9 million by the end of June from 15 million in the beginning of the year. This is a clear indication that despite six consecutive quarters of disappointing guidance, short sellers believe that the company is on the right track.

The company relies on fall-winter sales of its UGG-boots to drive its top and bottom lines, therefore its second quarter is usually its most difficult period. The company itself is expecting a loss and no revenue growth for its Q2 results due in one week — but I am looking forward to its winter-fall guidance. That outlook could indicate improvements in its earnings and net profit margin for the next two years (as shown on its website). Its balance sheet is also strong with $410 million of working capital. It currently has a low return on equity but this would also improve with growth in earnings. Therefore, Deckers Outdoor Corp (NASDAQ:DECK) has a very positive outlook.


Nike’s performance in China, from where it gets 9.7% of its revenue, needs a lot more work as the company continues to struggle in the country on the back of a slowdown in the Chinese economy. Its Chinese sales, excluding the currency effects, have fallen by 1% for the three months ending May 31 from the corresponding period last year. The current decline would mark Nike’s third consecutive quarterly drop in China.

NIKE, Inc. (NYSE:NKE) recently performed an overhaul of the top management of its Chinese operations, and is now working on making its goods more attractive to the sophisticated Chinese consumers, which is a step in the right direction.

Although the current fall is disappointing, I believe that it is still too early to make a judgment on Nike’s Chinese operations. Its performance hasn’t been stellar, but it is certainly not a failure. Everyone knew that China would be a tough market to operate in and it is proving to be just that. Nike continues to offer its products at discounts in Greater China, while its future orders for June through November have improved from a -8% reported previously to 0%.

The markets have been waiting for a turnaround of NIKE, Inc. (NYSE:NKE)’s Chinese operations (which was highlighted in Deutsche Bank’s recent ‘buy’ call), but so far this hasn’t happened. And I cannot find any indication of this happening anytime soon, although there are clear signs of improvements.

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