What Nike’s earnings report tells us about 3 consumer stocks in our portfolio

People walk past a store of the sporting goods retailer Nike Inc. at a shopping complex in Beijing, China March 25, 2021.

Florence Lo | Reuters

A warning from Nike (NKE) in its first-quarter earnings report has given us some serious insights into a handful of consumer stocks in the portfolio.

We call them “readthroughs”: valuable investment clues we find by sifting through financials and comments from other companies, including ones not owned by Jim Cramer’s Charitable Trust, the portfolio we use for the Club. While it’s a never-ending process, quarterly results and earnings calls are gold mines for these readthroughs.

TJX Companies

Shoppers come and go the TJ Maxx store at the Mall at Prince George’s on August 17, 2022 in Hyattsville, Maryland.

Chip Somodevilla | Getty Images

The biggest takeaway in Nike’s quarter — and not just for us, but for Wall Street overall — is that the apparel giant has a major inventory problem in North America. Its shelves in the region swelled 65% in the first quarter compared with the same three-month window last year.

  • The cause is understandable: pandemic-induced supply chain complications, such as late deliveries over the past two seasons and early holiday orders. Nike is not an outlier in experiencing this.
  • The effect is good news for TJX Companies: Nike is taking “decisive action to clear excess inventory,” according to Nike CFO Matthew Friend.

Retail’s inventory glut is a key reason why we started a position in TJX, the parent company of Marshalls and TJ Maxx, in late August. Apparel makers and sellers don’t want to hold onto excess goods, especially when more seasonally relevant clothes are on their way. They want to get rid of it, even if it means taking the kind of short-term hit to profits that Nike said it’s likely to experience.

Off-price retailers such as TJX are the beneficiary of these industry dynamics. Here is the company in its own words, in its 2021 annual report:

“With many retailers continuing to close stores and with congestion in the supply chain, we offer vendors an attractive solution for clearing inventory,” TJX wrote, adding later that it is “in a great position to take advantage of the plentiful off-price buying opportunities in the marketplace.”

Nike is likely utilizing multiple approaches to get rid of its excess inventory, including markdowns in their own stores. However, Nike’s quarter makes it clear the “plentiful off-price buying opportunities” that TJX Companies has seen have not disappeared yet.

TJX shares were up more than 1.5% Friday, while Nike shares slumped more than 10%.

Starbucks & Apple

Alex Tai/SOPA Images | LightRocket | Getty Images

Nike’s negative China sales serve as a reminder about the current complexities of doing business in the world’s second-largest economy.

  • Nike’s sales in China were $1.66 billion in the first quarter. While that met Wall Street’s tempered expectations, it still represented a 16% year-over-year decline.
  • Nike’s earnings before interest and taxes (EBIT) in China also fell compared with a year earlier, down 23% to $541 million.

We had not forgotten about Beijing’s attempts to enforce its so-called “zero Covid policy” and the economic problems associated with rolling lockdowns in major cities. Nevertheless, Nike’s results are worth considering in the context of Club holdings Apple (AAPL) and Starbucks (SBUX), two other consumer-focused companies that count on China for growth.

We recognize the types of products the three companies sell vary greatly. Still, we have to remember that just because lockdowns have been lifted, we’re not out of the woods with business disruptions showing up in quarterly results. Not only are the results backward-looking — in Nike’s case, they cover the three months ended Aug. 31 — but it will take time for things to normalize. Fortunately, our extended investment horizon allows us to be patient.

On Nike’s earnings call Thursday night, CEO John Donahoe compared China to inflation in that “we can’t completely predict it.”

But structurally, we see some very encouraging signs with consumers,” Donahoe said, adding that Nike’s head of China operations, Angela Dong, is “very clear that they’re seeing Chinese consumers are emerging from these lockdowns with a real hunger for innovation, quality, and energized storytelling.”

Donahoe’s sentiment is similar to what we heard from Starbucks earlier this month during the company’s investor day. China is a huge part of Starbucks’ long-term vision — potentially overtaking the U.S. as its biggest market by 2025 — but it’s not smooth sailing just yet.

“With a partial lifting of Covid restrictions in different cities, I am very pleased to report that our recovery in China is well underway,” said Belinda Wong, chairwoman of Starbucks China. “However, given ongoing restrictions under China’s dynamic zero-Covid policy and the unpredictability of the future outbreaks, we remain vigilant and our recovery path will continue to be nonlinear.”

For Apple, its China revenue declined 1% in the quarter ended June 25, with management saying the lockdowns took a bite out of demand. The launch of the iPhone 14 in the middle of this month could catalyze sales. Demand in China for high-end iPhone 14s appears “robust,” UBS analysts said in a note Thursday, with wait times for Pro models longer than they were in 2021. “However, somewhat expected, the least expensive iPhone 14 is readily available in China,” the firm said, meaning lower demand.

Bottom line

The bottom line is that for companies like Nike, Starbucks and Apple, it’s all about the reopening story in China. Investors understand its choppy, but further rationalization of pandemic policies will be good news for these companies. We saw it with Club holding Wynn Resorts (WYNN) as the gaming hub of Macao took steps toward welcoming tourists from mainland China again. Shares of Wynn, which has two properties in Macao, soared Monday in response to that news.

We’re not necessarily saying there’s a similar binary-type event that would spark major one-day moves in SBUX or AAPL. However, investors want more clarity around the operating environment in China. As they gain confidence that Beijing is easing off “zero Covid” in a real way, we expect it to work its way into the stock prices of Starbucks, Apple and the like.

(Jim Cramer’s Charitable Trust is long TJX, COST and SBUX. See here for a full list of the stocks.)

As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade.


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