Andreeva: Nike’s turnaround isn’t linear, especially in a hypercompetitive market

Frank Holland (Reporter) 00:00.070

good morning so you just lowered your price target after this earnings but you kept an overweight rating explain the rationale there lowering the price target but keeping the rating

Anna Andreeva (Senior Research Analyst) 00:08.750

yeah no good morning and thanks for having me great to be here listen quoting you know elliott hale himself this is not a turn around that's linear you know by any means they never are you know especially in a competitive consumer space and especially in this athletic space

Anna Andreeva (Senior Research Analyst) 00:26.790

which is an extremely competitive marketplace and it is taking a little bit longer but you know taking a step back he's been in this seat for just a little bit over a year and are they doing the right things to fix the business we think yes so for patient investors we do think

Anna Andreeva (Senior Research Analyst) 00:43.950

you know nike is still a good stock as we look into twenty six but having said that it is taking a little bit longer and i think patience is required all right

Frank Holland (Reporter) 00:53.590

looking at the north america business that's moving to the upside it grew year over year we spent a lot of time talking about how hoka and on are kind of taking market share from them that strengthened the US business does that dismiss that narrative or is that still really a

Frank Holland (Reporter) 01:06.670

real threat

Anna Andreeva (Senior Research Analyst) 01:08.270

you know i think that still makes some of the other brands you know in the space and this the pace of the share gains you know continuing over the next let's call it you know twelve to eighteen months a question we think you know especially hoka is at risk as you know nike has

Anna Andreeva (Senior Research Analyst) 01:29.310

been successful going back into the run specialty channel and hokus market share in that channel specifically you know is quite high and has been coming back we think with on it's a different consumer a different price point a different you know silhouette altogether so we don't

Anna Andreeva (Senior Research Analyst) 01:46.870

really see you know on that much at risk but yes you're right you know north america has been a bright spot you know for the business especially in wholesale DTC is a little bit more tricky in north america they're lapping pretty significantly promotional business from last year

Anna Andreeva (Senior Research Analyst) 02:03.670

so you're seeing some declines in that but you know they talked about wholesale existing partners seeing strength importantly new partners as well nike entered some new distribution in the last couple of quarters and some of the family channel as well as amazon and they had some

Anna Andreeva (Senior Research Analyst) 02:22.590

pretty good things to say about that so we think that's all moving in the right direction

Frank Holland (Reporter) 02:26.230

all right no it's not great the china business down seventeen percent six straight quarters of declines what exactly is going on there is that local champions taking market share from nike is it an anti american sentiment do they just not have the products that are getting

Frank Holland (Reporter) 02:38.270

people because we're seeing such a divergence from the north american business and the chinese business

Anna Andreeva (Senior Research Analyst) 02:42.990

yeah no exactly i i think you said it and it's really a combination of things on the call last night they talked about that the brand has become you know too promotional in the region they have not had enough newness inventory situation is still pretty elevated and you know they

Anna Andreeva (Senior Research Analyst) 03:03.550

are limited how quickly they can take markdowns and you know in the channel in china and DTC nike is seeing some relative you know less bad but it's really the wholesale channel that's been pretty challenged they talked about you know five thousand partners that they have in

Anna Andreeva (Senior Research Analyst) 03:21.870

wholesale in china so as you can imagine that's a pretty difficult you know task to turn around so again that's going to take some time they said for the out quarter expected china to be similar so china 's basically we're modeling down mid to high this next quarter as well as

Anna Andreeva (Senior Research Analyst) 03:40.550

the quarter after

Frank Holland (Reporter) 03:41.150

alright gotta ask about the tariff question the company saying has taken a one and a half billion dollar hit from tariffs just from southeast asia where obviously they sourced a lot of their sneakers and things are made there it doesn't seem realistic for them to move that

Frank Holland (Reporter) 03:50.910

production anytime soon how do you view tariffs in this company is there any way for them to mitigate it i mean as an investor isn't that just a a huge impact to profitability supply chain everything else i mean how does this company get around that

Anna Andreeva (Senior Research Analyst) 04:04.790

yeah so on tariffs you know they're really in the same boat as you know everybody else the one point five billion that's a gross number last night they talked about guidance for fiscal three Q and they said about three hundred and fifty basis points to gross margins that's a

Anna Andreeva (Senior Research Analyst) 04:22.350

gross number as well we're thinking the net number for the year which is a little bit less bad that's about a hundred and twenty basis points i mean listen they're offsets this is a company obviously at scale they are working with their partners like everybody else they are

Anna Andreeva (Senior Research Analyst) 04:39.750

taking price you know very selectively but some of the more premium product they've been able to pass through price increases but of course with that they're being careful but you know overall they're in the same boat as everybody else in the space

Frank Holland (Reporter) 04:53.750

so it doesn't sound like there's any near term answer they're just going to have to kind of absorb it and i guess when they can pass the price along