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• Nike is the world’s leading sports apparel business – though it’s currently facing some near-term challenges.
• Sales fell by 10% in its first quarter and are set to fall again by 8-10% in Q2. The company has been tightening supply of some of its major shoe products – includingAir Force 1 and Air Jordan 1 – to prevent discounting.
• This trend is expected to continue and, while painful from a sales perspective, should keep its brand value high and slowly deliver margin improvement.
• In Q1, cost discipline and pricing actions helped gross margins expand by 120 basis points to 45.4%, though these benefits are expected to be offset in Q2 by higher promotions to clear excess inventory.
• Adding to the uncertainty, the company is changing its CEO, with former president of consumer and marketing Elliott Hill rejoining the company after retiring in 2020. Hill boasts 32 years’ experience at Nike, beginning as an intern, and is expected to in his words deliver “bold, innovative products that set us apart in the marketplace”.
• While the company is struggling due to a mix of internal and external factors, its share price reflects this (down -22% so far this year (1), compared to a buoyant S&P 500). We remain optimistic about the strength of the brand, its products, and marketing capabilities. Additionally, the new chief executive appears to be more of a“product” person that should prioritise new designs that resonate with consumers.
• We see Nike as currently undervalued and view the recent declines in the share price as a buying opportunity for this sportswear leader.