Nike is in a leading position as the cost-of-living crisis intensifies
One of the themes we have been writing about lately is how the cost-of-living crisis driven by higher energy costs are lowering demand for discretionary consumption. This sector of the economy has been the hardest hit in financial markets in Europe over the past week. Nike is part of the consumer discretionary sector and have had to first deal with global supply chain disruptions and later input cost pressure. Until now, Nike has been dealing with all the uncertainties better than its competitors although last quarter saw revenue decline 0.9% y/y and the EBITDA margin declining to 13.5% from 17.1% the year before.
Nike reports FY23 Q1 (ending 31 August) earnings on Thursday with analysts expecting revenue growth of only 0.6% y/y and the EBITDA margin rebounding to 15.8%. The expectations of its operating margin rebounding is probably the biggest potential downside risk going into the earnings release. Given the ongoing demand destruction among consumers and the strong USD it is likely that revenue could disappoint again and that margins cannot bounce back. One key competitive advantage that Nike has over its competitors is that it is doing much better on digitalization and direct sales of its sports goods which is good long-term for margins. One looming threat to its growth is Lululemon Athletica which is a strong brand among women and has successful expanded its categories from being only about yoga earlier on.