Nike’s quarterly results (quarter ended May) once again punctuated many issues and themes we've touched on this past year, including another layer of higher ocean freight inflation impacting the next twelve months (potentially impacting gross margin by 100 bps), ongoing pressures from China’s lockdowns (25% of pressures), and healthy demand in the U.S. for athletic products (management cited no “pullback in consumer demand”, which was consistent with recent comments from Lululemon, Dick’s Sporting Goods, and others).
- Nike needs to drive top-line growth. With China unpredictable and Europe closer to a recession, Nike needs to rely on the U.S. for delivering growth. This means that Nike’s U.S. wholesale business should grow again as it allocates more inventory to that market (compared to the declining trend that it's been on). This also punctuates the theme that we’ve recently discussed: global brands turning their focus (on site selection efforts) to the U.S. consumer.
- Competition is also a factor for Nike to manage as On Running, Hoka, Brooks, and New Balance are making wide strides in the U.S. This week, On Running’s management told investors the U.S. will likely be the Nike's primary driver of topline growth for the next few years. As a reminder, On, Hoka, and Adidas quickly stepped into the Foot Locker shelf space that had been vacated by Nike. Additionally, Lululemon is just getting going and it has its own shelf space available to tell its story. As such, athletic footwear is going to be an increasingly store-driven category over the next year.
- Of note, freight is still a cost headwind in the 2H22 for those that utilize forward contracts as they now confront higher cost contracts despite the rollover in freight prices, as shown below in the FBX01 spot chart.