Coronavirus Slams Wide-Moat Nike’s Q4 Results
We do not think the pandemic will have any impact on the power of the brand, the source of our wide moat rating, and think it highlights its e-commerce, which jumped 75% in the quarter.
Nike’s (NKE) (May-ending) fourth quarter of fiscal 2020 was massively impacted by the coronavirus pandemic as most of its stores and those of its wholesale partners in North America, Europe, and other parts of the world were forced to close for about two months. Its 38% sales decline in the quarter was greater than our forecast 29% decline and it reported an operating loss, something that did not even happen during the 2008 financial crisis. Yet, we do not think the pandemic will have any impact on the power of the Nike brand, the source of our wide moat rating, and think it highlights Nike’s e-commerce, which jumped 75% in the quarter and reached about $5.5 billion for the year (about 15% of total). While we expect a slow recovery in fiscal 2021 due to widespread discounting of apparel, sequential growth looks likely as about 90% of Nike’s worldwide stores are now open. We do not expect to make any material change to our per share fair value estimate of $98 on Nike and view shares, which dropped about 4% on the report, as fully valued.
Nike’s sales in greater China increased 1% on a currency-neutral basis as its stores reopened earlier than in other regions and its e-commerce in the region grew 53%. However, sales in both North America and Europe, the Middle East, and Africa dropped a whopping 46%. The large sales declines, inventory obsolescence charges, and order cancelations resulted in a gross margin of just 37.3%, six percentage points below our forecast, and an operating loss of about $800 million (includes $180 million in bad debt expense). As stores were closed, Nike’s year-end inventory increased 31%. Overall, the firm reported an EPS loss of $0.51 in the quarter versus our $0.04 forecast.
Nike’s recovery from the COVID-19 crisis depends, in part, on the resumption of amateur and professional sports. We are encouraged that the NBA, European football, and other key Nike-sponsored sports have made plans to operate during the pandemic.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
David Swartz does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.