Nike Posted its Biggest Sales Contraction in 4 Years & Offered Disappointing Guidance

Nike Q4 FY2024 Results

The US sports apparel giant has been going through a rough patch over the last couple of years. Despite achieving record sales two quarters ago, growth has been anaemic and slowing for the past few quarters. Things deteriorated further in Q4 FY24 (three months ended May 31), as Revenues shrank by 2% y/y. This was the first contraction in two years and the biggest slump in four years. [1]

Adding to the woes, Thursday's report shows that the hardships will likely endure. Executives forecast that the revenue slump will deepen to around 10% in the current quarter (Q1 FY25) and also reversed their previous guidance for full year growth (FY25), now expecting revenue to drop "mid-single-digits". [2]

These results and guidance are particularly disappointing, considering that not one, but two major sporting events take place this summer. The UEFA Euro 2024 football championship is already underway and the Paris Olympics kick-off in late-July. These are great opportunities for sportswear firms to generate buzz and boost their sales and Nike is definitely pushing on the promotion front. Its demand creation expenses went up 6% y/y in Fiscal 2024 due to higher advertising and marketing spend.

The external environment is not particularly encouraging either. Price pressures in the US (its biggest market) remain elevated, while the central bank is reluctant to lower interest rates. The economy is strong but slowing and the robust labor market supports consumption, but conditions are easing. Americans remained enthusiastic spenders despite high inflation and borrowing costs, largely helped by savings accumulated during the pandemic years, but these savings are now gone according to the San Francisco Fed. [3]

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Sales in the key market of Greater China grew in Q4 FY24, helped by the 6.18 holiday promotional festival, but the region remains a source of uncertainty. Chief Financial Officer Matt Friend said that the near-term outlook for the region "has softened" and took note of "increased macro uncertainty" [2]. The country's post pandemic recovery remains bumpy, consumers keep their purses ight and fraught Sino-Western relations can harm the popularity of American brands.

Despite the disappointing results and outlook, net income and gross margin widened for both the fourth quarter and the whole Fiscal 2024. This shows that the leadership's cost cutting efforts are having an impact. As part of the turnaround plan Nike is also refocusing on innovation and new styles, in order to fend off increasing competition from newcomers like Hoka and On Running.

Nike also made a blunder with its recent sales channels shift, as it focused on a direct-to-consumer plan via its online and physical stores. However, it now tries to correct it, emphasizing again on wholesale. The firm's direct sales were down 7% in the reported quarter, whereas wholesale grew 8%, underscoring the importance of third-party vendors. [4]

It is clear though that turnaround plan needs time to work and the external environment is unfavorable, so challenges are likely to persist, at least over the coming months. CEO John Donahoe noted "real progress" on the comeback, but also spoke of a "transition year", while the CFO acknowledged that a comeback of this scale "takes time". [2]

Markets reacted negatively to Thursday's results and guidance, as the stock shed around 12% extended trading. The challenges the company is facing reflect on NKE, which is having another bad year.

Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 28 Jun 2024 https://s1.q4cdn.com/806093406/files/doc_financials/2024/q4/FY24-Q4-Combined-NIKE-Press-Release-Schedules-FINAL.pdf

2

Retrieved 28 Jun 2024 https://s1.q4cdn.com/806093406/files/doc_financials/2024/q4/NIKE-Inc-Q4FY24-UNOFFICIAL-Transcript.pdf

3

Retrieved 28 Jun 2024 https://www.frbsf.org/research-and-insights/data-and-indicators/pandemic-era-excess-savings/

4

Retrieved 15 Jul 2024 https://s1.q4cdn.com/806093406/files/doc_financials/2024/q4/FY24-Q4-Combined-Schedules-FINAL.pdf

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