Nike sees signs of recovery in China, which could be a good omen for other retailers

Glimmers of hope for Nike in China could be good news for other retailers with big business in the region.

Nike sees signs of recovery in China, which could be a good omen for other retailers

An employee works next to shoes on display inside the flagship store of sporting-goods giant Nike in Shanghai on March 16, 2017.

Johannes Eisele | AFP | Getty Images

Glimmers of hope for Nike in China could be good news for other retailers with big business in the region, as companies contend with a prolonged pandemic recovery and global unrest.

Nike shares climbed more than 5% Tuesday morning, after the sneaker giant said its China business is improving in spite of recent backlash against Western brands and a shortage of merchandise in the marketplace. Nike showed, at least for now, it is handling broader macroeconomic challenges, including ongoing supply chain backlogs, better than many had anticipated. Ahead of Monday's report, Nike shares were down 22% this year.

The results from Nike bode well for other athletic apparel retailers such as Adidas and Puma that have similar global exposure, analysts say. To be sure, Nike has yet to provide an outlook for its upcoming fiscal year, which begins in June, due to a number of volatile factors that could change between now and when Nike reports its fiscal fourth-quarter results. That still leaves room for trends to turn in the other direction.

For the three-month period ended Feb. 28, Nike said sales in China fell 8% year over year, better than the 12% drop that analysts had anticipated. It was also a marked improvement from the 24% drop that Nike booked in the prior quarter. China has notably been Nike's most profitable market.

Wedbush analyst Tom Nikic said in a note to clients that the biggest overhang on Nike's stock has been China, but now the region is "moving in the right direction."

"With significant brand momentum and long term [earnings] power driven by the direct-to-consumer initiative, we believe Nike remains one of the highest-quality, highest-visibility growth stories in our space," he said.

During a post-earnings call with analysts, Nike's management team explained the steps the company has taken to win shoppers' favor overseas. For example, Nike has partnered with two Chinese retail distributors, Top Sports and Pou Sheng, to extend its reach in the region. It also cited a recent brand campaign that was tied to the Beijing Olympics.

"We're encouraged by this momentum and what it says in terms of our optimism to be able to return to a long-term growth algorithm," said Chief Financial Officer Matthew Friend. "In the short-term, we're operationally watching the Covid-related lockdowns in the marketplace and the impact on the fourth quarter of these lockdowns is unclear at this moment ... but it feels different."

In the fiscal fourth quarter, Friend said Nike expects to see sequential improvement in China as it continues to monitor a recent uptick in Covid cases and renewed lockdowns.

Evercore ISI analyst Omar Saad called this quarter a "turning corner" for Nike in China. "We think the strong performance eases key concerns that Covid significantly derailed China demand," he said in a note to clients. "We also think this puts to bed concerns that any shift in demand towards domestic brands would significantly hamper Nike's growth."

Atlantic Equities analyst Daniela Nedialkova echoed this sentiment, writing in a research note that expectations for Nike's third-quarter report had been moving lower in recent weeks, sending the stock lower, particularly because concerns around China had been elevated.

There were also fears of Nike losing share to domestic brands amid supply chain constraints and inability to fully stock inventory, Nedialkova said. But on Monday, Nike reassured investors that it will still be able to hit longer-term targets that it laid out last year, she said.

For its current fiscal year, Nike reiterated its expectations for sales to grow mid-single-digits from the prior 12-month period. Analysts had forecast revenue to be up 5.3%.

Beyond trying to return to growth in China, Nike is navigating a complex environment on its home turf and biggest market in North America.

While consumer demand for its sneakers and apparel appears to be robust, a snarled supply chain still poses an issue. Nike said transportation times remain elevated in North America compared with other regions. It takes six weeks longer to get goods compared with pre-pandemic levels, the company said, and two weeks longer than the same period a year earlier.

To prepare for the fall season, Friend said that Nike has moved up its buying timeline in order to secure enough merchandise for the back-to-school rush.

"We are staying on the offense," said CEO John Donahoe. "Our confidence as we look long-term hasn't changed one bit."