Both problems are due to the same trend: the increasing popularity of online shopping compared to going to the store.
Nike (WKN: 866993) had to watch yesterday, as the share after the promulgation of the quarterly results somewhat yielded. This was attributable to weak sales growth in sportswear. The company revealed that the Christmas quarter was surprisingly weak. In addition, sales growth in the important American market did not rise as hoped for. The profits were also slightly lower as Nike had lowered the prices to separate from his oversized inventory.
Nike reports a 3% revenue growth in the North American region, which is on a line with the previous quarter. In the last nine months, however, sales in the US have increased by only 4%. This is a significant slowdown compared to the 7.5% from last year.
The bosses spoke of a difficult sales environment. “The North American retail sales environment is not a steady matter,” said financial analyst Andy Campion at the telephone conference with the analysts. The company’s gross margin fell by 1.4 percentage points to 44.5% of revenues, as price reductions were forced.
PICTURE SOURCE: NIKE
CEO Mark Parker pointed to electronic commerce as an important factor behind this problem. “Customers have decided that the digital area is not just a part of the shopping experience, but the basis for it.” This growth in the online channel led to a surprising change in the purchasing behavior. He said this had hurt customer traffic in North America and forced dealers to lower prices.
The good news is that Nike is working all over the world and only half of the sales come from the American market. In comparison, 85% of Under Armor’s sales (WKN: A0HLV4) come from the American market. Therefore, it is no surprise that this slowdown in the gross budget at Under Armor has been somewhat more dramatic. The company has lost 3 percentage points and is now at 44.8% gross margin.
NIKE GROSSWINNMARGE (LAST 12 MONTHS). DATA OF YCHARTS
The answer from Nike
Nike can not do much against a weak industry trend. Management has made it a priority to now float the retail market with products. This increases the pressure to lower prices. Recently, solid progress has been made. The inventory was reduced by 8% in the last quarter.
However, the long-term response to this question will require a rethink. First, you need more product innovations to keep the portfolio interesting for the customers. After all, customers have plenty of other options to choose from. The latest AirVaporMax sports shoe is a good example of this. The product ensures that you do not need an inner sole made of foam material. This makes the shoe lighter and also slightly thinner. This allows Nike to claim a premium from its customers.
The struggle for the innovations is however a more difficult, since also under Armor tries to attract paying customers, in order not to sell themselves too cheaply. “Our segmentation strategy could be better,” executives said after the outlook for the fourth quarter was missed. “At any price in the premium segment, the right product for the right customer is the criterion.”
Can Nike recover?
Nike already has a strong presence in electronic commerce. Growth in the last quarter reached 18%, which is well above the overall growth of 7%.
The profit margins in this channel will not impress the investors in the foreseeable future. The company plans to aggressively invest in order to defend itself against the online competitors. In the meantime, the economic situation in the shops should improve somewhat over time, if the inventory can be adjusted to the purchasing trends.
Investors can expect the revenue growth and the profits for Nike and the rest of the sector to remain weak until the thing works with electronic trading. Nevertheless Nike still has a lot of sales channels around the world, a massive marketing budget and the necessary innovations. These are all factors that suggest that Nike will develop better than its competitors during this downturn.
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