Coronavirus Slams Wide-Moat Nike’s Q4 Results

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.

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