How much could the coronavirus pandemic cost Nike Inc.?
Since the COVID-19 outbreak has leaped from its origins in China to the rest of the global of the global community, companies in the apparel and retail sectors have been bracing for impact, shutting down thousands of stores worldwide and taking precautions to curtail the spread of a disease that has sparked more than 153,000 cases, according to the World Health Organization.
A steady succession of retailers has re-issued or retracted financial guidance, a sign of how quickly the pandemic is unfolding and the depth of uncertainties surrounding the outbreak.
For Nike, the pain could be very real.
Though its December earnings report showed strong revenue and projected low-double-digit revenue growth through 2020, Nike now could see roughly one-third of its Q4 sales evaporate, according to a Cowen Research report Monday. Store closures announced Sunday morning that affect a spate of countries in the spasms of the pandemic are largely why Cowen sees a bumpy road ahead for the athletic giant. Nike operates 951 full-line and factory stores worldwide, per its 2019 10-K filing.
Nike is set to report Q3 earnings on March 24.
Based on recent developments, Cowen revised its Nike Q4 earnings estimates to a loss of 4 cents compared to its earlier estimate of a 69-cent gain.
For the full year, Cowen also projects Nike’s earnings per share will fall to $1.82 from the consensus Wall Street estimate of $2.90.
This will stem from a steep plunge in year-over-year sales, Cowen said. The new model estimates demand shriveling into August, with sales down 30 percent in North America, 40 percent in Western Europe and 35 percent in China—though growth is expected to rebound to 30 percent in the region by the first quarter of 2021.
Long term, Cowen believes that Nike’s owned e-commerce operations will help buoy the company against retail headwinds. Nike DTC, including stores and e-commerce, account for 26 percent of its total sales, Cowen said, estimating the channel will bring in $5 billion in sales.
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If department store and wholesale channels collapse, however, long-term growth for Nike could be under threat.
“We are more concerned on the health/viability of wholesale partners,” Cowen wrote in the report. “We note Foot Locker is currently a $2.4 billion market cap with $785 million in net cash on its balance sheet.”
Cowen stressed the risk to Nike of potentially losing wholesale and department store partners that “could move toward insolvency if/when COVID-19 causes a prolonged recession.”
Slowing mall traffic, fixed costs and future industry markdowns cloud its global predictions but the Cowen model takes into account China’s “gradual return to normalcy.” Cowen contacts in the region have suggested the nation’s retail traffic is down by more than half year-over-year, however, with the financial firm estimating Nike will see a 65 percent revenue drop in Q3.
How the outbreak plays out and molds the economy remains unknown. But a best-case scenario for Nike sees demand destruction normalize in time for Q4, with the company returning to single-digit growth by the first quarter of fiscal 2021.
The base case assumes demand normalization by the end of the first quarter of fiscal 2021 along with “significant demand destruction” around the world by December.
In the worst case, demand collapses and social-distancing “fallout” continues into the summer—causing mass retail bankruptcies and a consumer-led recession, Cowen said.