How China can make or break Nike’s sales and profits

BMO Managing Director and Senior Analyst, Simeon Siegel, joins Yahoo Finance to discuss an early preview of Nike’s Q4 earnings that expect the company to beat and how the main focus of investors might be centered around issues including: digital sales growth, improvements in supply chain execution, and, critically, assurance that geopolitical risks in China can be contained.

Video transcript

MYLES UDLAND: All right. Welcome back to Yahoo Finance Live on this Wednesday morning. First quarter earnings season has come and gone. We're now a couple of weeks out from second quarter earnings season. Wedged in the middle there as always is Nike. The company is set to come out with its latest quarterly results tomorrow after the closing bell. Joining us now to talk about what to expect from the retailer is Simeon Siegel, managing director, senior analyst over at BMO. Simeon, always great to have you on. So let's just talk about how you are seeing the quarter set up for Nike, and really where they're at in their life cycle. Their transformation, they've had a sea sweet change, they've had a major shift to D2C as part of their business, and also they've favorably ridden a lot of these pandemic trends.

SIMEON SIEGEL: Yeah, great to see you guys. And time is relative, I can't figure out if Nike is at the beginning or the end of an earnings cycle. It's a little bit depressing, one way or another. But I think it's a great question because here you have the largest seller of retail products in history of time essentially coming in that has really shown us this phenomenal ability to go global, and the phenomenal ability to transcend what for everyone else in the retail world has been this ubiquity block. Most companies when they hit a certain size they lose their brand cachet. Nike is able to take their limited launches and transpose them into selling much lower-priced sneakers in every other retail establishment.

So I think they're going through this interesting lifestyle change where they're now saying, OK, we can pull back wholesale, own the brand a little bit more through our own channels, elevate the product across the board, but still make sure we're catering to everyone. So you're going to have this interesting period here where tomorrow we're going to hear all of that vis a vis, North America, Europe, et cetera, but by the same token, we cannot ignore the fact that China for the first time in a long time is going to be disappointed. So I think the big question tomorrow is going to be, how temporary is the perception of any block in China versus what is the rest of the collective Nike trajectory look like?

BRIAN SOZZI: Simeon, glad you mentioned China because that brand and some others in the retail space have been swept up into these protests. Now, has that business for Nike in China, has that bottomed?

SIMEON SIEGEL: It's an interesting question because it's beyond the scope of the brand, and it's more geopolitical. So as we think about what's happening, there have been a lot of third party data that attract very low results at Tmall. Tmall Has been a very important part of Nike's China story. So do I think it's bottomed? I don't know. I think that the reality is the China story I don't think is going to be structural and long term. But I also don't think it's just going to be, let's snap our fingers and everything is back. And remember, I mean, Brian, you and I have talked this all the time, China is such an increasing-- has been such an increasing part of both Nike's sales, but perhaps even more importantly, of its profits. It's a much more profitable region. So I think tomorrow, I think the headline-- listen I-- you know I'm a bull, you know I like this for the long term perspective, I think what they have done, what they continue to do is somewhat unsurpassed, but I think the reality is we all need to acknowledge that a headline tomorrow is going to be China. And the question is, how bad, and how long?

That's going to be the reality that we're working through. I think everyone knows that. I can tell you all my investor conversations start with, how bad is China going to be tomorrow? But the question then is going to be, OK, so looking beyond, is this the brand, is there anything that changes your view of the brand, of what this brand has been able to accomplish. I think that answer is going to be no. I think we're going to still look at this power that's able to transcend a lot of both-- I mean, think of everyone who buys Nikes. It's beyond politics, it's beyond race, it's beyond demographic. So I think that that's ultimately going to be the biggest question. I don't think that one's going to be challenged while we have to just internalize that from a regional perspective, there's definitely going to be a conversation to be had.

JULIE HYMAN: And Simeon, to your point really what you're talking about is just the utter dominance of Nike over the past, call it decade, really solidified in the past five years. And also to your point, it sort of appeals to everyone from, you know, across the age spectrum, across the race and ethnicity spectrum, has a lot of fashion forward offerings that sneaker-heads want. Is there anyone out there right now in terms of other brands that are chipping away, or that you're watching to, you know, at all challenge that dominance?

SIMEON SIEGEL: So here's what's happening. We've spoken on this program throughout the past year and a half about they're certain brands that are becoming really compelling or have become really compelling stocks, specifically because they were shrinking to grow. That's not Nike. So the interesting story is, there's a lot of companies that have emerged and we're seeing these one offs. I think there was another one launched today, I think I saw from a former Nike athlete that are starting their own lines of footwear. I think that competition across apparel and footwear is not something that is new. So Nike has been able to drive forward. Obviously, there's a few really strong powerhouses Nike sits atop, but I think that competition is healthy, I think they would agree that competition is healthy.

Whether they are chipping off from each other or perhaps the bigger conversation is as we go back to work, what is the new uniform look like? Do the Nike's of the world actually start competing against traditional apparel? So did COVID actually expand the pie for anything athletic and athleisure so that the reality is it's not a battle of Nike versus Under Armor, but it's a conversation of how much share Nike, Lulu, Under Armor, et cetera, how much do they take from the broader wallet? Is this just going to become a normal attire for everyone? And I know there's a thought out there that this going to be the roaring '20s, we're all going to be wearing tuxedos with tails again. I don't know that I subscribe to that. So I think that that's going to be this dynamic. There's going to be a lot of people still figuring out how to sell sweatpants and sneakers. Does that chip away at Nike or is there just a broader appetite for it? I tend to be in the latter camp.

MYLES UDLAND: Yeah. Well, Simeon, as I think about going back to the office, I know that my Lulu five pocket ABC pants will be part of that uniform. So I guess that counts. On this topic, I wanted to double click on the footwear point because the performance versus casual breakdown has been so interesting for Nike in the last couple of years. And you bring up Under Armor which tried to make a big play, has made a big play into footwear and from my opinion, just hasn't worked to the extent the company wanted it to. What does that portfolio look like? I mean, do individual players still drive sales the way that Nike expects them to? Is it still all about the sneakers app and what's happening with Jordan brand? How do you think about the footwear side of it for the company?

SIMEON SIEGEL: Yeah. Miles, it's such a great question because there's this idea, listen, from a silhouette perspective, I mean, Under Armor did not catch up. I think collectively, externally, internally, I think they would agree that they didn't achieve everything they wanted to achieve, especially considering who they had repping their brand. So having Steph repping their brand, I think they they were looking for a larger runway. But that said, a billion-dollar footwear business is nothing to be ashamed of. So I think that the reality here is the question of what are people-- how large is large, how high is high, is this ongoing conversation.

I think we will continue to see stars endorse product. I think that the reality is figuring out how to use a LeBron or a Steph Curry to tell people you can be like Mike, right, at the end of the day by simply buying a pair of $50, to $150 pairs of sneakers has been some of the beauty of this business. There is a reason that the athletic players all spend 10% to 12% of sales on marketing. That's not the same level-- that's not in traditional retail. That is the price of entry because there's so much of the story Nike in addition to being one of the top seller of consumer products is also probably one of the best marketers in the world. So I think that that becomes part of that story of telling me, what are these shoes do for me, and using a superstar to do that has been effective. I think will continue to be effective for a very long time.

So I think you'll have this concentration of very strong players. You'll have on the other side of the barbell the emerging, whether it's comfort, we think about the old birds of the world, whether it's just different startups, I think there's room for all of them. And I think the question is, how do they tell their story to resonate with that end consumer?

BRIAN SOZZI: Simeon, switching gears a bit. I have a story on the Yahoo Finance Homepage now looking at the rise in American Eagle's Aerie's intimates business. Now, the stock has been up about 8% the past two days after Brooke Shields posted a photo on her Instagram account in Aerie bathing suits with her two daughters, and I think it just highlights how far that brand has come. My question to you is, why is Aerie still a part of American Eagle, and should it be spun off?

SIMEON SIEGEL: Wow, that's a curveball. I like I like the question. Listen, I think that there is plenty of room. You could probably make the argument both directions, right? This notion of some of the parts became just as prevalent as my notion of shrinking to grow over COVID. So figuring out companies being able to really for the first time in a long time be allowed to take a surgical approach to their portfolios, decide what they want to keep versus what they want to put on the block. So I think last year was the year to do that. I think they would say there are synergies in terms of those two brands. So the overlap versus what they can share, I think the reality is, a lot of the stores are still actually side by side so they've been moving away, they've been opening up their own. Not unlike trends we saw with Victoria's Secret and Pink several years ago.

But I think that the reality is Aerie has been growing pre-pandemic as well. So they hit on the theme, they hit on reality, right? Aerie Real had been an early campaign that Victoria's Secret is now backing into. And the reality is that share that Victoria's Secret is donating is probably being picked up by Aerie in a very healthy way. So whether they're separate or not, I think we continue to see Aerie strength. I think the question is, if you can get American Eagle stable with Aerie's strength, that's not a bad proposition together. And that's been that story. So I think that's a margin-- there are worse things in the world than having nice cash-generative businesses that can then be further boosted by a hypergrowth segment.

The flip side of all that, obviously, we finally, this week, got the Victoria's Secret Bath and Body Works spin announcement. So that was finally-- or the filing. So now that's very much moving forward for the conversation that we've been having for a very long time. So we are seeing certain companies realize or appreciate that they can unlock value from a stock market perspective and an operational perspective if they're separate. But I would argue that Victoria's Secret lingerie and Bath and Body Works scented candles are much further apart than American Eagle and Aerie.

MYLES UDLAND: Simeon, Val's noting in our Slack that we can't have you on the program without Victoria's Secret coming up at least one time. So I know we'll have you back, I know we'll do. More of Victoria's Secret and L Brands in the future. Simeon Siegel, thanks for jumping on talk a little bit about Nike's report tomorrow, American Eagle, and everything else happening in retail. Always appreciate it, and we'll be in touch.