A quick look at Nike’s performance in China tells you a lot about what’s going on in that market, and why Chinese stocks have been clobbered so hard.
First, as you can see from this earnings table (down at the bottom line), sales in China grew 8% year-over-year, not horrible, but not insane, and actually slower than the growth in North America.
But here’s where it gets more interesting.
Despite the 8% growth, earnings actually shrunk in China from last year.
THIS is the story of the hard landing of corporate China.
Top line growth is decent, but it’s not that great, and with higher costs, the income decline has been stunning. Nike is doing OK overall, but its China business is suffering from the same dynamics as so many Chinese corporations, which has sent the Shanghai Composite to multi-year lows.
Meanwhile, Reuters flagged an interesting comment from the conference call:
The (Chinese) consumer is becoming more discerning and sophisticated. At the same time the economy seems to be slowing, creating short-time challenges for retailers,” Charlie Denson, president for the Nike brand, said on a conference call with analysts.
“It’s a natural evolution we’ve seen in many markets, so we’re not surprised,” he said.
Here’s the full paragraph, via Seeking Alpha:
OK. Finally, China. Lots of forces at work here and as you’ve heard us say before, the consumer is becoming more discerning and sophisticated. They want clearer choices. They want more innovation and better services that are tailored to them. At the same time, the economy appears to be slowing, creating short-term impacts for any company doing business there. Certainly, retailers are seeing profit challenges as the industry works to absorb excess inventory. Some choppy waters here for sure. This is a natural evolution that we’ve seen in many markets, so it’s not a surprise. What is a surprise, like everything in China, is how fast they got here. But we’re not waiting to see how things play out in the larger economy. We’re taking action now to adjust our strategy and expand our leadership position for the long term. We do that by strengthening our fundamentals, and those fundamentals are the same in every market: brand, product and distribution. First, we continue to leverage our brand strength by connecting with consumers through amazing experiences. A great example here is the Festival of Sport. It was 60-day celebration of sports and athletes in multiple cities, and the response was beyond anything we’ve ever seen in China.
So that’s the story. Slowing top-line. Income collapse. A more discerning consumer. The Chinese gravytrain is over for now.
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