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Nike Struggles with Growth in China Amid Increasing Competition

November 04, 2013 | About:
The leading sports apparel and equipment manufacturer Nike (NKE) is still struggling in China. In its previous quarterly results posted around a month ago, the company delivered strong earnings and managed to beat the consensus estimates. The robust result came on the back of an increase in demand and a drop in costs related to raw materials. However, its performance in China was far from satisfactory while its future, in this enormous market, still looks challenging.

Strong Growth, Except China

In the first quarter of fiscal year 2014, Nike’s revenues rose 7.7% to $6.97 billion from $6.47 billion in the same quarter last year, which is in line with Wall Street’s expectations. Its earnings rose 37.6% from the same quarter last year to $0.86 per share, comfortably beating analyst’s estimate of $0.78 per share.

The growth in revenue can be attributed to all of its brands that reported an overall growth in revenues to 7%; including Footwear’s growth of 7%, Apparel’s growth of 6% and Equipment’s growth of 4% from the same quarter last year. Nike’s Men’s training, soccer, basketball and running categories performed really well and offset the current decline in sportswear. Nike’s wholly owned subsidiary Converse also posted strong growth. Its revenues rose 16% to $494 million due to better performance in the UK, North America and China.

In the previous quarter, Nike reported reasonable growth numbers in almost all of its operating regions, except Greater China. Although the company also reported just 1% growth in Japan, but in China, unlike all other regions, Nike’s quarterly revenues dropped by 3% year over year, excluding the impact of currency changes, to $574 million.

China’s Performance

The company reported a drop in sales of Footwear and Equipment segments while Apparel showed a growth of 6%. Due to margin expansion efforts and a drop in demand creation expenditure, Nike reported a 3% increase from last year in China’s EBIT to $170 million. With the exception of sportswear and basketball, Nike has struggled with growth in all other categories in China. Nike also brought NBA’s All Star lineup to the country, which includes LeBron, Kobe, Kevin Durant, Carmelo Anthony, Chris Paul, Blake Griffin and Russell Westbrook, so that these stars could connect with Nike’s customers and their fans. This, without doubt, had a positive impact on the company’s sales as well as its brand.

Nike is currently working on further segmenting the market to create more product differentiation. Years of experience have taught Nike that this should improve consumers' satisfaction. Meanwhile, it is also working to improve its merchandising in the country. Essentially, Nike is currently doing, what it calls, a “reset” of its Chinese operations.

Nike’s management has pointed out during the conference call that China remains an integral part of the company’s long term future. The company has been laying down a foundation on which it expects to achieve future growth. In the words of its CEO Mark Parker, "The race in China is a marathon, not a sprint, and we're set up for the long run." In other words, the short term will likely remain challenging. For the next quarter, Nike is targeting growth in the country while for the full fiscal year 2014, the growth will be in line with last year’s results.

The company’s future orders scheduled for delivery from September through January 2014 shows a growth of just 3% in Greater China, which is better than Japan and Emerging Markets but significantly lower as compared to other regions in North America and Europe. This shows that, at least for the short term, there is not going to be any meaningful positive change in Nike’s Chinese operations.

Mounting Competition

China’s $24 billion sportswear market is a fiercely competitive one where Nike’s might is being challenged by local rivals, such as Li Ning, as well as international players, such as Adidas AG (ADDYY). According to the market-research firm Euromonitor, Adidas holds 11.2% market share in China and is just behind Nike which holds a share of 12.1%. Meanwhile, due to the enormous size of the market and attractive future prospects, China continues to attract new companies. Baltimore based Under Armour (UA), has opened its first ever experience store in Shanghai. The company has been eyeing international expansion, particularly in the emerging markets.

Notes:

Nike Q1 FY2014 Results (Pdf)

Nike Q1 FY2014 Earnings Transcript (available here)

By Sarfaraz A. Khan and Gohar Yousuf

Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review.Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.

About the author:

Sarfaraz A. Khan
Sarfaraz A. Khan is a capital market analyst and finance writer. His specialty lies in energy stocks. He also covers consumer goods, services sector, technology stocks, emerging markets and ETFs. His work appears on TheStreet, Seeking Alpha, Motley Fool and GuruFocus.

Visit Sarfaraz A. Khan's Website


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