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NIKE to Witness Near-Term Softness on Store Closures in China

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The outbreak of coronavirus in China has given rise to a tough situation for companies operating in the region. Leading sportswear retailer NIKE Inc. NKE is among the companies that are anticipating the current situation in China to have a material impact on its results. Yesterday, NIKE announced that it has temporarily closed nearly half of company-owned stores in Greater China in response to the coronavirus outbreak.

Further, it noted that the stores that are open are operating with reduced hours and witnessing lower-than-expected footfall. Given the epidemic outbreak in the country, NIKE is prioritizing on health and safely of employees and its partners. Consequently, it expects China operations to witness softness in the near term, which should have a pronounced impact on overall results.

The company stated that the current situation was not accounted for in its fiscal 2020 guidance, which was provided during the announcement of second-quarter fiscal 2020 results. During the third-quarter earnings call, it expects to provide an update on financial and operational impacts from the coronavirus outbreak on its results.

However, for the long term, the company remains confident about the sustainability of its brands and business momentum in Greater China and the neighboring regions affected by coronavirus. It continues to see China as a key long-term opportunity, as consumers remain connected with innovative and inspiring offerings. This connection is well demonstrated by continued strength of the NIKE digital business in the region.

Notably, Greater China remains key part of NIKE’s global strategy, with currency-neutral revenues in the region rising 23% in second-quarter fiscal 2020. This was the 22nd straight quarter of the company’s double-digit growth in Greater China. Its solid growth in China is attributed to improvement in almost all key categories and every marketing channel.

Further, the company continues to witness unmatched digital growth in the region, with 44% improvement in NIKE digital recorded in the last reported quarter. This growth was aided by partnerships with Tmall and WeChat. Moreover, the results benefited from the launch of the NIKE app in Greater China.

For fiscal 2020, the company had earlier anticipated revenue growth, on a reported basis, of high-single digits, indicating slight increase from fiscal 2019. It projects gross margin expansion of 50-75 basis points.

For third-quarter fiscal 2020, the company expects revenue growth in high-single digits, even though at the very low end of the range. On a currency-neutral basis, the Zacks Rank #2 (Buy) company anticipates strong revenues despite foreign currency headwinds.

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