(Corrects syntax in headline) By Savyata Mishra March 31 (Reuters) - Nike beat expectations for third-quarter earnings on Tuesday, as the sportswear giant's turnaround efforts showed some signs of
Nike forecasts surprise sales drop as China weakness hurts turnaround efforts
Nike's Financial Performance and Turnaround Challenges
By Savyata Mishra and Nicholas P. Brown
March 31 (Reuters) - Nike's forecast of a surprise drop in fourth-quarter sales on Tuesday sent its shares down more than 9% in extended trading, as persistent weakness in China and slow progress in clearing older inventory hamper turnaround efforts.
Turnaround Strategy Under CEO Elliott Hill
Under CEO Elliott Hill, Nike has pulled back promotions, stepped up product innovation and refocused on core franchises like running, as it tries to reset the business after years of excess inventory and uneven demand across North America and China.
But the turnaround "is taking longer than I would like," Hill said on Nike's third-quarter earnings call. Chief Financial Officer Matt Friend projected a 2% to 4% drop in current-quarter sales, compared with Wall Street estimates of a 1.9% rise, according to data compiled by LSEG.
China's Impact on Nike's Sales
In China, where operational missteps have collided with fierce domestic competition, Nike's sales fell 10%.
Friend said Nike made "forward progress" in the region, as running grew double-digits. The decline was an improvement over last quarter's 16% drop in China.
Future Outlook for China
Yet Friend warned that the improvement may not be linear. The company is reducing selling in China as it works through a backlog of old inventory, and expects China sales to fall a staggering 20% next quarter, Friend said.
Greater China is Nike's third-largest market, after North America and EMEA, and it accounts for 15% of annual sales. But it's been a slog in recent quarters, due to a combination of weaker product assortments and share losses to local competitors Anta and Li Ning.
Inventory Management and Investor Concerns
Inventory Continues to Mount
As Nike aggressively tries to clear out old stock across the globe, it is marking down items, which squeezes margins. In its European market, in particular, "promotions across the marketplace were up versus the prior year," and "we were also more aggressive with promotions on Nike digital," Friend said.
Even accounting for those efforts, Friend expects Nike to end next quarter with elevated inventories, a forecast he attributes to softness in demand for sportswear, ongoing promotion and disruption from conflict in the Middle East.
Investor Sentiment
The protracted effort to clear inventory could be spooking investors, said Morningstar analyst David Swartz. "They've been saying they were doing that since the 4th quarter of last fiscal year, so investors may be asking, 'Why wasn't that enough?' How long should that really take?" Swartz said.
Hill preached patience after recent leadership changes. "We've got the teams reorganized from a product perspective," he said. "Spring 2027 will be the first time we see the fruits of those teams working together."
Revenue and Profit Margins
Revenue Comes in Flat
The sportswear retailer's revenue was flat at $11.28 billion in the third quarter ended February 28, but came in above analysts' average estimate of a 0.3% drop to $11.24 billion, according to data compiled by LSEG.
Bright spots in an uneven quarter included wholesale revenue, which jumped 5% to $6.5 billion, helped by stable sales in North America. Direct-to-customer sales, though, fell 4%, dragged by muted demand in Europe and China.
Earnings and Margins
Nike earned 35 cents per share in the quarter, beating estimates of 28 cents.
"The U.S. has been the area Nike has been performing best in our visibility and, as such, a dent to American consumer confidence would blunt Nike's recovery efforts," M Science analyst Drake MacFarlane said.
The company's gross profit margin contracted for a sixth straight quarter, falling 130 basis points to 40.2%, mainly due to tariffs.
(Reporting by Savyata Mishra in Bengaluru and Nicholas P. Brown in New York; Editing by Anil D'Silva)
