Nike cuts down its annual earnings outlook amidst cautious consumer spending, and a weak period of online business. The company said it is planning to cut supplies of key products to control costs, sending the stock spiraling down by 11%.
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Announcing a lower than expected sales forecast, Nike announced its plans to save $2 billion over the next three years by improving its supply chain network, managing the supply of a few product lines, increased use of automation, and reduced management interference.
Once making the lion’s share of business, the wholesale segment of Nike has been under constant pressure amidst a sloppy demand from the consumers, leading the retailers to place fewer orders.
A similar trend is seen in the online platforms as weak demand is forcing the company to increase its promotional efforts. Moreover, sales in China, which was one of Nike’s biggest consumers’ has also decreased due to a major economic slump in the world’s second largest economy.
Nike’s Chief Finance Officer, Matthew Friend noted in his post earnings speech that. “we are seeing indications of a more cautious consumer behavior around the world.”
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The Projections
As Nike cuts down its earnings outlook, it is now projecting the revenue to grow by a mere 1% in the next fiscal year, compared to a prior growth of mid-single digits, and contrary to analysts expectations of 3.8% growth.
Nike forecasts its revenue to remain negative in the current quarter, despite the holiday shopping season when compared to the high sales experienced during the same period last year.
The finance chief further mentioned that, “in the last quarter I highlighted a number of risks in our operating environment, including the effects of a stronger U.S. dollar on foreign currency translation, our second half wholesale order books, and a sloppy consumer demand over the holiday season. When looking forward, the impact of these risks is becoming clearer.”
Moreover, the new outlook reflects an increased headwind, particularly in the EMEA region and greater China. Despite all these forecasts, Nike is still believing its gross margins to grow by 1.5%, excluding the restructuring charges, which it will be giving on its full-year earnings outlook.
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The Plan Moving Forward
As part of its plan to cut costs and save around $2 billion over the next 3 years, Nike will be focusing on thinning its product assortment, increasing the use of technology in its operations, and leveraging economies of scale by bringing automation and streamlining processes.
A senior equity analyst at Morningstar views in this situation that, “Nike’s talking about reducing the number of products … perhaps the company feels there are too many products that are not high-margin and not really generating significant sales.”
The company also plans to reinvest its savings into fueling future growth and focusing on long-term profitability.
In his briefing, Matthew Friend mentioned, “as we look ahead to a softer second-half revenue outlook, we remain focused on strong gross margin execution and disciplined cost management.″
According to the estimates, the plan will cost the company somewhere around $400 million in before tax restructuring charges during the current quarter.
The company posted a net total revenue of $13.39 billion in the second quarter, slightly lower than the budgeted $13.43 billion. However, the per share earnings improved drastically to $1.03 per share from an estimated $0.85, thanks to lower freight charges.
Nike’s shares has increased by less than 5% this year, compared to a massive rally of 24% in the previous year in the S&P 500 and a 52.5% growth in value for adidas.
