As coronavirus cases surge across the U.S. and the market braces for more potential closures, Nike could need a strong Q1 to stay ahead of the competition
It’s been a weird few months, there’s no denying that. Even with the coronavirus panic briefly subsiding before coming back strong since states began to reopen, the stock market still seems so disconnected from the economy. Meanwhile, we appear to have all-but lost our intense fascination with at-home stocks such as Netflix (NASDAQ: NFLX) and Zoom (NASDAQ: ZM) in favor of the stalwart tech stocks; Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT), et al. We’ve also just ignored ongoing issues between President Trump and the likes of Twitter (NYSE: TWTR) and Facebook (NASDAQ: FB).
Meanwhile, the ‘new normal’ appears to just be ‘normal’ now, with nobody batting an eyelid at Tesla’s (NASDAQ: TSLA) delayed AGM or that Apple (NASDAQ: AAPL) is holding its first-ever online-only World Wide Developer Conference.
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Amidst all this though, its business as usual, and one company that has perhaps flown under the radar, Nike (NYSE: NKE), will report on its Q1 earnings this week.
What to expect from Nike’s Q1 earnings
While the world of bricks-and-mortar retail continues in its decline, Nike appears to have bucked that trend with its stock is still up 15% year-on-year. This compares favorably versus the likes of popular retail brand Nordstrom (NYSE: JWN), which has fallen 49% in the last year alone.
The coronavirus has changed everything though, with Nike forced to close stores across China, the U.S., and Europe to combat the spread of the virus, all of which took place within its last quarter.
For its earnings call on Thursday, investors will be focused on how Nike performed in its all-important Chinese market. There was much rejoicing when Nike reported that sales in China only shrank 4% last quarter despite widespread store closures, especially when its digital segment saw a jump of 30%. This number gives hope of growth in China, which saw sales grow 24% in the last full fiscal year to bring in $1 billion in sales.
We can expect a less optimistic outcome from Europe and the U.S. which saw the bulk of COVID damage take place after the last quarter, with sales growth shrinking to 4% through February of this year. Investors will be hoping that the company will still report a profit in its larger domestic and European markets.
What about Nike’s competitors?
Investors can take a look at the performance of Nike’s biggest competitors in the U.S. to get some idea of how the company might perform. However, depending on who they look at, sentiment could either turn wonderfully optimistic or despairingly pessimistic.
Ever a dessert man, I like to leave the best for last, so let’s discuss Under Armour (NYSE: UAA) first:
Once heralded as the darling of Wall Street, Under Armour has been on a downward spiral, falling 76% in the past 5 years. Sales have dwindled, growth is dead, and most worryingly, teenagers don’t like their products anymore. The coronavirus simply poked a few more holes in an already leaking boat. In Q1, Under Armour saw revenue fall a whopping 23%, and reported in mid-May that sales had fallen 30% in North America through March.
And now onto the fresh-faced rival to Nike in the game, Lululemon (NASDAQ: LULU). Despite reporting an overall annual sales drop of 17% through early May, the athleisure company still generated a Q1 profit of $29 million — albeit much lower than the $97 million in profit it roped in a year ago. So even despite a pandemic-driven dive in sales, Lululemon, which is but a fraction the size of Nike, still managed to pull off a profit. Could Nike perform similarly despite losses?
So, how will Nike do?
Nike really is in a league of its own, which gives it the distinct advantage of having the resources to ride out any major global event. As of the end of its last fiscal year, it boasted cash reserves of nearly $5.5 billion, so it will be interesting to see if the coronavirus bit into this. Many analysts are expecting Nike to see sales fall around 25% in the fiscal fourth quarter to roughly $7.6 billion. However, I am more interested in seeing their online sales growth and how this might impact the business structure moving forward.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.