Nike’s inventory woes stretch to China as covid recovery remains a challenge for brands

REUTERS
REUTERS

Summary

  • As supply-chain snarls ease up for big firms, Covid-19 lockdowns mean reduced sales and tighter margins for companies

Nike Inc.’s quarterly results highlight how some U.S. brands have too much inventory at home and in markets like China, where the companies have placed big financial bets.

The sneaker giant on Thursday said revenue from China in the August quarter fell 16% to $1.65 billion, citing Covid-19 lockdowns in different cities hurting store traffic.

The announcement came as the company posted weaker quarterly profit and soaring inventory levels, two developments that helped send its shares down about 13% Friday.

In recent months, the company, which has operated in the country for 40 years, has been discounting merchandise and canceling orders from manufacturers to reduce its inventory. China accounted for about 13% of its sales and 29% of its earnings before interest and taxes in the August quarter.

“We are taking a cautious near-term approach in Greater China, given the continuing risks of Covid-related disruption," Nike Chief Financial Officer Matthew Friend told investors on Thursday. Despite the sales decline, Nike executives said that the results in China were better than expected and that they remained confident sales would increase in future quarters.

Frequent lockdowns across Chinese cities have companies guessing how long the disruptions will last and the impact they will have on sales.

The lockdowns and a recent heat wave have disrupted companies’ production plans and slowed deliveries, affecting such goods as sneakers, cosmetics and apparel.

In addition, elevated inflation, shifts in foreign investment and a downturn in the housing market have hurt China’s economic growth and weakened the yuan.

Companies are beginning to conclude that at least some of their challenges in China aren’t temporary, said Leland Miller, chief executive of China Beige Book, an economic and policy research firm.

“There’s a massive conversation that has started on whether the China of the future is the land of opportunity that everyone assumed it was," Mr. Miller said. “This has just started to hit boardrooms in a big way."

Covid-related disruptions will likely ease over time—though it could take longer than many companies have predicted—and regulatory and trade policies may loosen and tighten as China’s interests shift, Mr. Miller said. But geopolitical tension and some regulatory risks will remain high, he added.

Executives from Western companies have been telling investors and analysts that the challenges they are facing are temporary and aren’t changing their investment plans.

Adidas AG said in August that it is no longer expecting sales in China to recover during the second half of the year. Adidas revenue from the region declined about 35% in the June quarter and the company is expected to mark down products to help move excess inventory. About 13% of the German company’s revenue came from China in the latest period.

Sales at Estée Lauder Cos. fell 19% in its most recent quarter in the Asia-Pacific region, where the company made about 31% of total sales. The cosmetics company said in August it was hard hit by the citywide lockdown in Shanghai, which went on for two months and hurt the company’s distribution for the entire region until the end of May. The skin-care product maker said first-quarter sales were expected to be negatively affected by continued restrictions in China.

VF Corp., which makes clothes and shoes under Vans, the North Face, Timberland and other brands, told investors on Wednesday that it expects a slower recovery of its China business in the company’s second half, which starts in October. About 14% of VF’s sales were made in the Asia-Pacific region in the fiscal year that ended in March, its securities filings show; the company didn’t break out sales in China.

This story has been published from a wire agency feed without modifications to the text

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