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Nike’s retail strategy ‘should result in more full-priced’ products: Analyst

Goldman Sachs Equity Analyst and Managing Director Kate McShane joins Yahoo Finance Live to discuss company earnings for Nike, marginalized pressures, China's COVID-19 lockdown, and the outlook for the footwear manufacturer's growth.

Video transcript


BRIAN SOZZI: Nike is in focus today after its fourth-quarter earnings warned of more pandemic-related disruptions to come in China. But the retailer's CFO is saying they are taking a cautious approach to the region. Joining us now to discuss is Goldman Sachs Equity Analyst and Managing Director Kate McShane. Kate, always great to see you. Look, I think a lot of folks are surprised by this market reaction off this Nike quarter.

They missed on many parts of their business sales, and margins inventory up more than sales. What was your take on the quarter?

KATE MCSHANE: Yes, I think that's all correct. Honestly, there were some misses here. But going into the quarter, speaking to investors, the greatest concern was on China. And I think now that we have the news, in terms of what happened in China during the quarter-- sales were down 20%, China EBIT was down 55%-- now investors can kind of take stock of what's happened. And Nike's given a game plan on how they plan to resolve it. Why we're in this situation, of course, is because of COVID lockdowns.

It impacted many brands in China during the quarter, and Nike wasn't any different. The company does plan to aggressively work through the higher amount of inventory in the market, and they are guiding that they should see more of a pull market, which is their words, by the end of their fiscal Q2.

BRAD SMITH: As they work through that inventory-- we've heard their long-term goal is to be at 65% full-price realization. But as they're working through that inventory, it sounds like they're going to have to do more of the deep discounting.

KATE MCSHANE: In China, specifically yes. It's something they did during the quarter. It's something that they're going to continue to do the next couple of quarters. I think in other regions, you have a better inventory situation. There still is some tightness in the supply chain. So what we have seen in the last year or two is-- because of very high demand and a very tight supply chain, you have seen more full-price selling and sell-through.

There is guidance across the retail industry that as the supply chain gets more in balance and demand comes off a little bit, that you will see more promotions going forward across the board. Nike, though, has been cleaning up their marketplace, has been pulling back from undifferentiated retail, and that should result in more full-price selling going forward overall.

JULIE HYMAN: I guess good for Nike, not so good for those of us who are in the market for sneakers at a lower price, Kate. We were sort of talking about the general consumer trends earlier, this sort of shift that we are seeing in what consumers are spending money on, right? Of course, we saw that in the case of Target. We're seeing it in the case of the shift to services and travel, in particular, from goods. Is that something that we are seeing or could see affect Nike, and how are we seeing that play out on a larger basis?

KATE MCSHANE: Yes, it's a great question. And I do think we are seeing signs of that consumer wallet shift. Like you mentioned, Target was one of the first ones to flag it. We're seeing way more purchases in things like beauty and luggage, things that support kind of a reopened economy versus comfortable clothing, for instance. But I think what might be different for Nike with regards to demand going forward is there is a strong underlying health and wellness trend.

I think that was only accentuated during the pandemic. And that's something that should probably sustain industry growth for the longer term. I don't think we have to worry as much about a pull forward in footwear and athletic apparel as maybe we do other categories.

JULIE HYMAN: Kate, just quickly a follow-up on that. What percentage of Nike's sneakers and apparel now are performance versus lifestyle? It seems like the scales have really tipped towards lifestyle in the past, say, decade.

KATE MCSHANE: It's a great question. I don't think we have those numbers from the company. How I like to think about it is, you know, you find you're more performance sneakers for athletic occasions, like playing basketball or playing soccer, in places like the sporting goods stores, so like Dick's Sporting Goods. And the more lifestyle has always been in more of the mall, like Foot Locker. But you know, now that Nike is going more direct and partnering with these wholesale partners differently, you are seeing more of a shift in terms of what retailers are selling, in terms of performance and lifestyle.

And of course, you know, Nike is selling everything themselves as well. So I don't know if the mix has necessarily changed significantly over the years. They've always had a good balance between performance and lifestyle. But that is some of the shift that we're seeing, where the wholesale channel is changing and Nike is selling more directly.

BRAD SMITH: We do know that real hoopers will play in anything, Kate, and so that is my argument, at least for when I step on the court with them Pandas, or whatever is out there. So additionally here, I will admit I'm no FX expert. However, it's been interesting to see how many companies have been citing some of the FX headwinds. Not just Nike. We've heard this in the tech sector as well.

How much of a headwind do you expect this to be for the current quarter that we're in, or wrapping up, and ahead of the next earnings season?

KATE MCSHANE: Yes. So it is going to be a headwind. I mean, that's where we did get a little bit more guidance from Nike last night. They did mention that currency neutral. They expect their sales to be up 7% to 8%. And I believe there's a 400 basis point headwind as a result of currency for them. Nike being a global brand for so many years has always had to deal with these currency headwinds when they arise, so one good thing, at least on the top line, is there is a good degree of visibility of how much currency can impact the top line.

But you can read through exactly what that means for sales, and then parse out if the underlying sales are still strong. So currency is a headwind. It does weigh on the top line and the margins. But it is something that you can anticipate. And again, you can look at what the underlying trends are, ex-currency, to assess the health of the business.

BRIAN SOZZI: OK, moving off Nike. I was looking at your coverage list, and you have a sale rating, I believe, on shares of Best Buy. Now, what does that reflect? Is that you being concerned about how a recession shapes their financials this holiday shopping season?

KATE MCSHANE: We've had this sell on Best Buy actually for a while-- I think since December 2020. And the couple of things that we highlighted at the time and continue to highlight is that we do think consumer electronics has been more of a beneficiary of people staying home than not. So again, going back to the wallet shift that you guys mentioned earlier, part of what Target did see during their past quarter was a shift away from consumer electronics.

I think it makes sense. We had a big work-at-home, education-at-home culture when the pandemic was going on. It doesn't mean to say that no one will buy another consumer electronic again. But the compare is so much harder, we think, for consumer electronics than certain other categories. I think we also worry about the gross margin outlook for Best Buy as well. This is not one of the companies that saw huge margin increases during the pandemic.

They kind of stayed within their range. And now, this year, as we get into a more promotional environment-- and again, that's every category-- in addition to the fact that they're rolling out their Total Tech Support business, you are going to see weight on gross margin as well. So we just think there's a little bit more risk around those numbers in '22 than there are maybe for other companies we cover.

JULIE HYMAN: We'll be tracking it. Thanks, Kate. Good to have you on. Kate McShane, Goldman Sachs equity analyst and managing director, talking to us about retail. Appreciate it.