While discussing results for the third quarter, Nike expressed optimism in the future, despite the coronavirus outbreak currently spreading across the globe. Just last week, the retailer reopened its first store in the Wuhan area of China, where the outbreak began, CEO John Donahoe said on a call with analysts. Stores in North America will reopen on a case-by-case basis, CFO Andy Campion said.
Nevertheless, operations in Greater China were "materially impacted" by COVID-19, with revenues down 4% on a currency neutral basis after 22 consecutive quarters of double-digit growth, according to a company press release. Overall gross margin and net income in the quarter were also hit by the coronavirus. Going forward, however, the company expects Q4 revenue in the Greater China region to be roughly flat.
Having reopened the majority of stores in China, Donahoe noted that some stores have already returned to prior-year traffic levels. The company's approach to handling the pandemic in China will be adapted to the rest of its markets as well. "We now have a playbook that we can use elsewhere," Donahoe said.
Despite challenges posed by the coronavirus outbreak, Nike revenues for the quarter still rose 5%, to $10.1 billion (an increase of 7% on a currency-neutral basis). Notably, digital sales were up 36% year over year.
While some analysts have noted that e-commerce won't be enough to make up for losses in brick-and-mortar traffic, Nike is banking its coronavirus response playbook on digital. Just a few days ago, Nike dropped the subscription fee for its NTC Premium streaming workout service in the U.S., mimicking a similar move made in China. Donahoe noted that after making training available to Chinese consumers, engagement through its training apps in China translated into sales through its commerce apps, and led to 30% growth in its digital business in the region.
Thanks to the retailer's success in getting its business back to a state of normalcy in China, many of the same tenets will be used to maintain the company's health as the pandemic sweeps across Europe and the U.S. Mostly that means finding ways to interact with customers virtually, including through its recent "Play inside, play for the world" campaign.
"Digital is where the water is flowing," Campion said. Nike executives agreed that the pandemic would lead to an acceleration in the adoption of digital, which was already a focus of the company. "It's accelerating quite a bit of change in consumer behavior," Campion added.
Nike execs said they are not worried about the company's financial health going into the crisis in the U.S. "Liquidity will not be an issue for Nike," Campion said. "In order to ensure resilience in challenging times, we have long maintained a strong balance sheet, a strong investment grade credit rating and ample access to capital."
The retailer had $2.9 billion in cash and equivalents at the end of February.
Nike's Q3 performance
|Nike brand revenues||$9.6 billion||+5%|
|Converse brand revenues||$506 million||+9%|
|Gross margin||44.3%||-80 BPS|
|Net income||$847 million||-23%|
Source: Nike press release
New product launches also won't be deterred by the coronavirus outbreak. Donahoe said the brand will launch products — even those tied to events like the now-postponed Tokyo Olympics — on their own time and might turn to digital-only drops as well, which Nike did in China earlier this year.
"I do have one guarantee," Donahoe said. "When the gates reopen, when the first whistle sounds, the energy is going to be off the charts. The world's passion for sports remains undiminished. And when it returns, Nike will be right there."