Growth Stalls. Nike Plunges 9% Premarket, Iran Conflict and Weak China Sales Hit Recovery Dreams

TradingKey - Nike (NKE.US) shares tumbled more than 9% in after-hours trading on Tuesday ET. The company expects an unexpected decline in revenue for the fiscal fourth quarter, exacerbating investor concerns that the war in Iran will undermine its recovery efforts. The stock has dropped 17% so far this year.

[Nike Plunges Pre-market, Source: Google Finance]

Earnings reports show that Nike (NKE) recorded revenue of $11.3 billion for the fiscal third quarter ended Feb. 28, exceeding average estimates but staying flat year-over-year; earnings per share were $0.35, beating the expected $0.28.

Nike CFO Matt Friend stated in the post-earnings conference call that revenue is projected to decline 2% to 4% in the fiscal fourth quarter beginning in March. This downturn could last the entire calendar year, whereas analysts had previously forecast at least 2% growth starting this quarter.

Reasons for Nike’s Downward Sales Revision

Nike (NKE) stated that inventory levels in Europe and the Middle East remain elevated due to promotional activities and transport disruptions caused by war. These headwinds, along with weakness in Greater China and other business segments, overshadowed strong performance in North America.

Sales in Greater China continue to face pressure. Due to operational missteps and intense domestic competition, Nike (NKE) reported a 10% decline in third-quarter sales, with fourth-quarter sales in the region expected to drop by approximately 20% due to market volatility from rising oil prices and the ongoing conflict in the Middle East.

Furthermore, sales for Nike subsidiary Converse declined more than expected.

[Source: TradingKey]

Chronologically, Nike's (NKE) gross margin has been under downward pressure for the sixth consecutive quarter year-over-year, falling 130 basis points to 40.2%. During the post-earnings call, management stated that tariffs were the primary cause.

The company is struggling in China, its second-largest market, due to an insufficient product assortment; meanwhile, a slowdown in innovation has allowed local competitors Anta (K82020) and Li-Ning (HK2331) to erode its market share.

Additionally, the Sportswear line was another point of concern last quarter, with discount rates remaining high as the segment experienced a double-digit decline.

[Source: TradingKey]

At present, there is still no foreseeable recovery in Nike's growth rate.

Given Nike's bleak outlook, the lack of a clear strategy for Greater China, the combined impact of inventory backlogs from geopolitical conflicts and tariffs, and management's frank admission that future sales will remain weak, Nike's stock price may continue to face pressure at this level.