Nike warns of margin pressure; Evergrande silence spooks Nike warns of margin pressure; Evergrande silence spooks Nike warns of margin pressure; Evergrande silence spooks

Nike warns of margin pressure; Evergrande silence spooks

Equities 6 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  Nike has done well during the pandemic and last night's Q1 results were overall also good, but at the margin the company warns about margin pressure from higher freight prices and rising input costs, on top of longer delivery times. On the positive side, Nike Direct showed strong performance with revenue up 25% in constant-currency terms. Evergrande is back haunting investors as the Chinese real estate developer has remained silent leaving bondholders and investors guessing whether the company paid its bond coupon yesterday.


Nike has seen a phenomenal rebound in its business from the lows during the pandemic. Revenue in Q1 (ending 31 August) was $12.3bn vs est. $12.5bn up 16% y/y and gross margin was 0.2%-points better than expected at 46.5%. EPS was $1.16 vs est. $1.12 up 22% y/y. However, shares traded 4% lower in extended trading as comments on the conference call about shipping times from Asia to North America had doubled to 80 days and all of its footwear factories in Vietnam were currently closed due to Covid-19 restrictions and were not expected to reopen until October.

The significantly lower inventory level of Nike is evident of these supply chain issues and company also warned that higher ocean freight surcharges would eat to margins. On the positive side, Nike’s direct-to-consumer channel grew revenue 25% on a constant-currency basis, which is key for Nike’s future margin expansion. The message from Nike was an echo of FedEx indicating that the Q3 earnings season could very well be all about margin pressure and could become a net positive for technology companies that operate under fewer constraints in the physical.

Source: Saxo Group

After yesterday’s rally in global equities the risk-off mood has returned with investors getting spooked by the silence from Evergrande which saw its shares tumble 12% in today’s session. Given how fragile the situation is around Evergrande and the wider real estate developer industry, it is incomprehensible why Evergrande, after announcing an agreed coupon payment due yesterday, has failed to update the market on a successful payment on its bonds. It leaves investors wondering whether the developer actually has the money and maybe is in a much more distressed liquidity situation than previously thought.

Source: Saxo Group

In terms of risk to sentiment, our view is still that the Chinese real estate developer situation can be solved by a transfer of risk from the private sector to the government balance sheet. We are much more worried about the unfolding energy shock in Europe, with rapidly rising electricity prices eating into household disposable income and margins of industry, and rising natural gas prices shutting down fertilizer plants. A food and energy crisis has the seeds to do much more damage, so this is a key risk to monitor for Europe going into the winter months.

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.