How long can brands stay top of mind in the absence of traditional marketing channels and open stores?
Ask Nike Inc. in a year and they might have the answer.
With the spread of COVID-19, the company has shuttered many of its outlets worldwide. Additionally, its regular avenues for major advertising, including the Olympics, National Basketball Association and other organized sports leagues, are also on pause for the foreseeable future.
How does Nike, or any global retailer for that matter, navigate such a challenge?
There is no shortage of bears who view these dual threats as a major issue for enterprises such as Nike (NKE).
Moody’s has revised Nike’s credit outlook to negative, and analysts are slashing 12-month stock price targets. Some see losing the Olympics and professional sports seasons as a lost opportunity for increased international expansion and exposure. Furthermore, upcoming quarterly revenue and net income projections are plummeting as the rate of store closings rises.
The investment community is bracing for an ugly income statement. Indeed, retail analysts for many product categories are posing similar questions as to what upcoming quarterly financials will look like.
Though the situation will probably get worse before it gets better, there is a contrary and bullish case to be made for Nike.
Given its large presence in China, the company was one of the first affected by issues related to COVID-19. During the peak of the Chinese outbreak, Nike had to close 5,000 of its roughly 7,000 stores and operated with reduced hours and staff at the locations that remained open. While this dramatically decreased in-store traffic, Chinese e-commerce grew by 30 per cent, and the number of weekly active Chinese users on Nike apps grew by 80 per cent by the quarter’s end. Nike’s successful pivot to digital suggests it remained relevant to customers despite reducing stores and losing key marketing venues, like the NBA. Since the end of the quarter, China has reopened 80 per cent of its locations and shopping activity is slowly – very slowly – returning.
Now that North America and Europe are in the grips of the pandemic, Nike is rolling out the playbook it developed in China. Stores are being shut, and the pivot to e-commerce and apps is going full steam. Though each country is different, the organization may well duplicate its Chinese tactical success here in North America, as well as in Europe. Moreover, when the crisis does pass, the company will have a good idea of how it can best revitalize retail operations thanks to the experience in China.
Nike’s brand appears resilient enough to weather the storm, but investors also need to ask, “Is the balance sheet clean enough to get them through a crunch?”
One can point to the famous bankruptcy filing by General Motors in 2009 as proof that an iconic symbol alone is not enough to endure a crisis.
Though GM has long since relisted, the carmaker’s storied 100-year history did not protect its shareholders during the dark days of the Great Recession. Fortunately for Nike, its balance sheet is in good shape. Net debt is low, current assets are nearly double current liabilities, and the organization has ample liquidity. This provides the enterprise with a lot of ammo to fight through the current downdraft.
Finally, investors must wonder about Nike’s relative performance versus peers. It’s too soon to say what Nike’s relative brand ranking will look like versus others, such as Adidas AG, Under Armour Inc., and Reebok International Ltd., once the COVID crisis is over. Nevertheless, it’s clear this Oregon-based firm continues to connect with customers in a meaningful way through this period. It’s possible they come out ahead; at the least, their competitors are facing all the same challenges too.
A year from now, investors may know a lot more about how elite multinationals can maintain their images in the absence of traditional marketing channels and bricks-and-mortar retail. This year will be rough – perhaps, for some, even devastating.
However, the financial aspect of Nike’s position is robust, and the famous swoosh is unlikely to disappear from the minds of consumers. The company continues to connect with cooped up customers via their fitness apps, driving online sales. When stores finally reopen and leagues like the NBA get up and running again, Nike will still be there, and the brand will arguably remain as relevant as it is now.
The market may be coming around to this thesis; NKE has regained nearly half of its recent losses and its performance is significantly better than many peers in the retail space.
Philip MacKellar is a writer for the Contra the Heard Investment Letter