Morning Note: Market News and an Update from Nike.
Market News
China and the US finalised a trade truce last month in Geneva, with Beijing agreeing to deliver rare earths in exchange for lifting US countermeasures. The deal was signed two days ago, Secretary of Commerce Howard Lutnick said. The White House has imminent plans to reach agreements with 10 major trading partners, he added. EC President Ursula von der Leyen said the EU was prepared for all eventualities in its trade negotiations with the US, including a breakdown in talks, and is assessing the latest US tariff offer. The EU has until 9 July to reach an agreement before the tariffs on nearly all of the bloc’s exports to the US will increase to 50%.
US equities moved higher last night – S&P 500 (+0.8%); Nasdaq (+1.0%) – with both indices closing near all-time highs. Nike bounced 11% after hours following encouraging results (see below).
Treasuries were firmer with curve steepening after a solid auction – the 10-year currently yields 4.25%. The dollar hit its lowest level against a basket of other currencies since February 2022, as traders ramped up bets on rate cuts on reports that a new Fed Chair will be named sooner than expected. Despite this, gold slipped below $3,300 an ounce.
In Asia this morning, equities were mixed: Nikkei 225 (+1.2% to close back above 40,000); Hang Seng (-0.3%); Shanghai Composite (-0.7%). Brent Crude trades at $68 a barrel. Oil options now price under a 4% chance of a major disruption at the Strait of Hormuz, down from 15%, Goldman said, with the geopolitical risk premium falling below $1 a barrel.
The FTSE 100 is currently 0.2% higher at 8,758, while Sterling trades at $1.3740 and €1.1730. Prime Minister Keir Starmer agreed to soften a £5bn cut to welfare after pressure from members of his party. The decision will leave less fiscal room for the country’s budget.
Source: Bloomberg
Company News
Last night, Nike released results for the financial year to end May 2025 which were slightly better than market expectations. The plan to return the business to growth is ongoing, with some notable encouraging wins. On an upbeat analysts’ call, the company provided guidance for the current quarter which painted a more optimistic outlook than expected although there is still plenty of uncertainty ahead. In response, the shares climbed by 11% after hours.
Nike is the world’s leading sports footwear and apparel company. We are positive on the long-term outlook for the business, with the company well placed to benefit from increased consumer demand for healthier living and the shift to personalised products. Nike has a very strong brand and an impressive track record of product innovation.
However, in the near-term, the group is faced with a number of challenges:
· the rebalancing of the business from a concentration on key product franchises (Air Force 1, Air Jordan 1, and Dunk) towards new products
· a subdued macroeconomic backdrop with continued promotional activity
· increased competition from new brands such as On and Deckers’ Hoka
· an admission that the company was too aggressive with its push with Nike Direct sales (in particular digital) at the expense of wholesale partners which are essential to elevate its brand and grow the total marketplace.
In response, former senior executive (and 32-year Nike veteran) Elliott Hill has returned to the company as CEO. Given that much of the recent corporate malaise is down to management/strategy, the hope is that Nike will return to its roots and the culture that made it so successful. The plan is to ‘lead with sport and put the athlete at the centre of every decision, leveraging athlete insights to accelerate innovation, design, and product creation’.
The group has accelerated its multi-year cycle of innovation and pulled forward several new products, especially in high-volume areas like running, training, football, sportswear, and Jordan. During the latest quarter, the company launched running shoes Pegasus Premium and Vomero 18, and plans to launch a new women’s activewear brand in the US in partnership with Kim Kardashian-owned shapewear clothing company Skims. The brand, called NikeSKIMS, will include training apparel, footwear, and accessories for women.
The company is also shifting NIKE Digital to a full-price model and reducing the percentage of the business driven by promotional activity. The company is going to continue to be aggressive in sports marketing across leagues, associations, teams and individuals.
Overall, immediate action has been taken in areas that will make the most near-term impact. The company has admitted change will take time and “turnaround efforts may hurt in short term”, with sales and gross margin in decline. However, the results from the latest quarter provide encouragement that the group’s turnaround plans are on track.
In the financial year to 31 May 2025, revenue fell by 9% on a currency-neutral basis to $46.3bn. In the final three months of the financial year, revenue was down 11% at $11.1bn. This was better than the company guidance to be ‘down in the mid-teens range’ and the market estimate of €10.7bn.
Nike Brand sales were down 9% in the year to $44.7bn and by 11% in Q4. The Converse brand fell by 18% to $1.7bn in the year and by 26% in Q4. By region, Nike Brand revenue declined across all geographies in the year: Asia Pacific & Latin America (APLA, -3%); Greater China (-12%); North America (-8%); and Europe, Middle East, & Africa (EMEA, -10%).
Nike Brand sales are split into Direct sales (both online and through Nike-owned stores) and wholesale revenue from third party retailers. During the year, Nike Direct sales fell by 12% to $18.8bn, with digital down 20% and stores flat. Encouragingly, stores were up 2% in the final quarter. Wholesale fell by 6% to $25.9bn. By category, it was encouraging to see Running return to growth in the final quarter.
During the last quarter, the gross margin fell by 440 basis points to 40.3%. This was in line with guidance for a 400-500 basis points decline and reflected the actions described above to clean and reset the marketplace, such as higher discounts and changes in channel mix. For the full year, the gross margin fell by 190 basis points to 42.7%.
Selling and administrative expenses fell by 3% in the year, with demand creation expense (i.e., marketing) up 9%, primarily due to higher brand marketing expense and higher sports marketing expense. Operating overhead expense was down 7%, partly due to lower wage-related expenses. Full-year EPS fell by 42% to 2.16c. In Q4, EPS rose by 86% to 14c, slightly above the market forecast of 13c.
Inventories remain elevated across all geographies, although flat over the year to $7.5bn. By category, AF1 inventory has stabilised, while Dunks inventories remain elevated. On the call, the company highlighted the quality of the inventory in the marketplace has ‘improved’ and reiterated that inventories remain on track to be in a healthier position by the end of the group’s first half (i.e. November 2025). Encouragingly, there are positive signals of progress in the wholesale channel.
The group’s balance sheet remains very strong – with net cash of c. $1.2bn. During the year, the group bought back $3.0bn of its own stock as part of its 4-year $18bn share repurchase programme, although the pace prudently slowed to $0.2bn in the final quarter. Given the current level of the share price, this comes as a bit of a disappointment. The annual dividend was raised by 8.3% to 157c, marking the 23rd consecutive year that Nike has increased its payout.
On the call, the company provided detail on the impact of tariffs and its response through a combination of optimised sourcing, new retailer arrangements, price increases, and cost cutting. For the current financial year, the gross impact will be $1bn, with a net headwind to gross margin of 75 basis points, with most of the impact in the first half.
Given where the company is in its restructuring programme, Nike is currently only providing quarterly guidance rather than annual guidance. Over the near term, the net effect of the strategic actions will continue to result in lower revenue, gross margin pressure, and higher marketing expenses. However, the outlook of the current quarter was slightly better than market expected, helped by the group’s full order book, an encouraging signal of acceptance for the new product roster. Revenue is expected to fall in the mid-single digits (vs. consensus of -7%), while the gross margin is forecast to be down by 350bps to 425bps (including a 100bps tariff impact).
Source: Bloomberg
