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NIKE (NKE) Expects Soft Q4 Results on Coronavirus Qualms

Zacks Equity Research

NIKE, Inc. NKE has almost fully resumed store operations in Greater China and South Korea after a prolonged period of lockdown due to the coronavirus outbreak. Notably, all stores in China have now reopened, while more than 95% of stores in South Korea are operational, with some stores operating for reduced hours. The company noted that the retail traffic in these locations has been gradually gaining momentum, although in-store traffic trends continue to be softer than the prior-year period. However, higher conversion rates and robust demand in the digital space have been catalysts.

Encouragingly, management remains optimistic about consumers' increasing preference for a healthy lifestyle, which will help it maintain the brand’s solid momentum. Alongside this, solid performance in the digital arena and strong financial stability are likely to keep the company afloat during these trying times.

The company is witnessing robust engagement in its digital ecosystem, evident from the accelerated new member acquisition and strong online demand globally. The company has particularly seen greater traffic and engagement in its mobile and activity apps amid the store closures. To meet the higher-than-expected demand, Nike has increased its digital fulfillment capacity. This is likely to offset the decline in in-store sales.

Additionally, the company is gradually reopening stores in North America, EMEA and APLA as some states and countries are easing restrictions. So far, NIKE has reopened stores in more than 15 countries, including Germany, France, the Netherlands, Brazil and the United States. As of May 14, operations began in nearly 40% of stores in EMEA, 15% in APLA and 5% in North America. These included both NIKE-owned and wholesale partner stores.

Further, the company remains committed to safeguarding the health of its employees and customers by following instructions issued by local health authorities and governments. It is undertaking safety protocols, including social-distancing rules, restrictions on store traffic, sanitization of products, distribution centers and facilities, and providing masks to employees.

However, most of the NIKE-owned and wholesale partner stores remained closed since mid-March to contain the spread of COVID-19. This resulted in delayed shipments to wholesale customers, leading to lower wholesale revenues and higher inventory. This is likely to have affected the NIKE Direct and wholesale businesses in North America, EMEA and APLA in fourth-quarter fiscal 2020.

NIKE, which shares space with Under Armour UAA, lululemon athletica LULU and Skechers SKX, notes that impacts and the duration of this situation remain uncertain. Consequently, it expects to provide further updates during the fourth-quarter fiscal 2020 earnings call. Earlier, in its fiscal third-quarter report, the company refrained from providing any guidance for the fourth quarter and fiscal 2020.

We note that shares of this Zacks Rank #3 (Hold) company have lost 15.1% in the past three months compared with the industry’s decline of 17.7%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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