Key Takeaways

  • EPS was -$0.51 vs. the $0.02 analysts expected.
  • Greater China sales fell by 3%, rising by 1% excluding currency changes, as China began to reopen.
  • Sales in North America dropped by 46% as the U.S. was locked down for the quarter.

What Happened

Nike announced its first quarterly loss since the beginning of 2018. This $0.51 per-share loss was significantly worse than the $0.02 per-share profit that analysts had expected. Revenue was also worse than expected, coming in at $6.3 billion versus the expected $7 billion. Sales in North America, Nike's largest market, fell by 46% year over year. Sales fell by similar amounts around the world except for the Greater China region, where they largely stabilized, rising by 1% excluding currency fluctuations. Digital sales rose by 75%, making up 30% of total revenue, helping Nike's pivot to direct to consumer sales. As new flareups of the coronavirus appear, Nike will need to continue to grow its digital infrastructure if re-openings are halted or slowed.

(Below is Investopedia's original earnings preview, published June 22, 2020)

What to Look for

Nike Inc. (NKE), the world's leading athletic apparel company, is among the many retailers and consumer products companies hurt by the COVID-19 pandemic. The company said in mid-May that all of its company stores and most of its partner outlets had reopened in Greater China, and that it was gradually reopening stores in North America. Investors will be focusing intently on how these trends are affecting Nike when it reports results for Q4 FY 2020 on June 25. Nike, whose 2020 fiscal year (FY) ended May 31, could be a bellwether of the effects of the pandemic as many U.S. companies report earnings in the next 2 months. The news from Nike will be mostly grim. Analysts expect a 96.5% plunge in earnings per share (EPS) and a 31% drop in revenue for the quarter. EPS and revenue also are expected to fall for the year.

Two key metrics investors will focus on are sales growth in Greater China, a major foreign market for Nike, and also North America, its biggest market. The results may be mixed. Nike's sales in Greater China are expected to fall only slightly year over year (YOY) as digital sales partly offset lower-than-normal business volume at retail outlets during the quarter. North America sales are expected to drastically deteriorate. The mixed results reflects the staggered timeline in which the coronavirus has spread, originating in China before spreading to other parts of the world.

Nike shares reflect both optimism about the company as well as its success in boosting digital sales in China and elsewhere amid the pandemic. After an initial plunge earlier this year, Nike shares have rebounded and rose within a hair of their all-time high this month. They have outperformed the market over the past 12 months, with a total return of 15.8% compared to the S&P 500's total return of 5.9%

One Year Total Return for S&P 500 and Nike
Source: TradingView.

Nike reported strong results through Q3 of FY 2020. The company, for example, posted EPS growth of 14.5% and revenue growth of 5.1% for Q3, which ended February 29, 2020. The company, at that time, noted the negative impact of COVID-19 on its business in Greater China. But the company said that growth in digital sales and strong growth across business in other global regions, including North America, helped to offset the impact. Nike's shares jumped the day following the report and have been outpacing the broader market ever since.

Prior to the outbreak of the virus, Nike had been experiencing some of its fastest growth in recent years. The company posted EPS growth of 33.8% for Q2 FY 2020, its fastest pace in at least 12 quarters. Revenue grew 10.3%. Nike's shares continued to trend higher until mid-January.

Expectations for Q4 and Nike's entire FY 2020 clearly reflect the negative impacts of COVID-19. As indicated, both EPS and revenue are expected to plunge. These results also will drag down the entire year, with analysts estimating EPS will decline 10% for all of FY 2020 as revenue drops 2.6%.

  Estimate for Q4 2020 (FY) Q4 2019 (FY) Q4 2018 (FY)
Earnings Per Share $0.02 $0.62 $0.69
Revenue (B) $7.0 $10.2 $9.8
Greater China Sales (B) $1.7 $1.7 $1.5
North America Sales (B) $2.5 $4.2 $3.9

Source: Visible Alpha

The weakness in Nike's financials is expected to be driven by sales in North America, the region that generates the majority of the company's revenue. North America sales comprised approximately 41% of Nike's total revenue in FY 2019. Sales for the region grew 4.4% in Q3 and 5.3% in Q2 of FY 2020. But North America sales are expected to slide 38.8% in Q4, clearly reflecting the impact of COVID-19 on the region and the subsequent store closures.

Nike's Greater China sales may give a glimpse of how North America could rebound economically once it starts to open retail stores and business on a broad basis. This may depend to what extent the U.S. and Canada are as successful as China at reducing the spread of the virus and controlling future outbreaks. Nike's Greater China sales, which comprised about 16% of Nike's total revenue in FY 2019, fell 5.2% during Q3 FY 2020, which ended in late February, during which the pandemic started to spread rapidly on the mainland. Sales had grown by 19.6% in the previous quarter, Q2 FY 2020. Despite the ravages of the pandemic, Nike is expected to maintain a high level of Greater China sales in Q4 2020 amid the steepest economic downturn in China in decades: sales are expected to fall just 1.7% YOY.