Nike's Quarterly Sales Fall Short Due to Weak China Demand

Nike, the global sportswear giant, reported a larger-than-anticipated decline in its first-quarter revenue, causing a slip in its share price by 1.2% post-earnings. The company's revenue for the three months ending August 31, 2024, totaled $11.6 billion, representing a 10% year-over-year decline. This figure fell short of Wall Street’s consensus estimate of $11.65 billion. The decline is primarily attributed to a weakened demand in China and heightened competition from emerging global brands.

Confronted with weak consumer spending in China, exacerbated by high youth unemployment and a sluggish property market recovery post-pandemic, Nike faced challenges in several key performance areas. Nike Direct revenue fell by 13% year-on-year to $4.7 billion, while Wholesale revenue declined 8% to $6.4 billion. Additionally, Converse revenue dropped 15% to $501 million compared to the same period last year. These declines led to a 26% year-over-year decrease in earnings per share (EPS) to $0.70, though this figure surpassed estimates of $0.51.

Despite the disappointing revenue results, Nike's gross margins improved by 120 basis points to 45.4%, aided by cost-cutting measures and reduced supply of underperforming products. CFO Matthew Friend acknowledged the shortfall but highlighted early wins in key sports and innovations, suggesting that a turnaround is in progress. "Nike's first quarter results largely met our expectations. A comeback at this scale takes time, but we see early wins — from momentum in key sports to accelerating our pace of newness and innovation," said Friend. He added that Nike's teams are energized as they anticipate new growth strategies under the leadership of Elliott Hill, who will be returning as CEO.

The company also announced its decision to withdraw its annual revenue forecast and postpone its Investor Day, which was originally scheduled for November 19, 2024. This move grants Hill greater flexibility to evaluate current strategies and business trends as he prepares to assume the CEO role on October 14. Hill, who spent 32 years at Nike before retiring in 2020, is expected to rebuild wholesale partnerships and navigate through the ongoing strategy reset.

Outgoing CEO John Donahoe's focus on direct sales through Nike's own stores and website had led to reduced shelf presence at U.S. retailers such as Foot Locker and Dicks Sporting Goods, which faster filled with products from fashionable competitors like On, Hoka, and New Balance. Despite efforts to fast-track innovation with new product lines such as Air Max Dn and Pegasus 41, Nike has yet to see substantial sales benefits.

First-quarter data revealed that Nike’s footwear sales in the U.S. and Europe both decreased by 14%, while sales in Greater China fell by 3%. Analysts had expected a 10% fall to $11.65 billion. This has led to concerns among investors and analysts alike. Dave Wagner, head of equities at Aptus Capital Advisors, expressed his disappointment, "I am pretty disappointed by the revenue number here ... this is not a great report whatsoever by any stretch of the imagination from a quantitative standpoint, but also from a qualitative standpoint of canceling the investor day."

Looking ahead, analysts anticipate that Nike’s EPS could reach $0.82 on revenue of $12.47 billion for the second quarter. However, the uncertainty surrounding the ongoing strategic adjustments and leadership transition adds a layer of complexity to Nike’s near-term outlook.