22nd Mar 2022 14:15
(Alliance News) - The strong demand for Nike Inc's products stands to benefit JD Sports Fashion PLC as availability for the sportswear maker's ubiquitous footwear improves.
Nike shares were up 5.7% at USD137.43 in New York, the best Dow 30 performer. In London, JD Sports shares were up 2.6% at 152.60 pence on Tuesday in a positive read-across.
The Beaverton, Oregon-based firm late Monday reported a dip in third quarter earnings, though managed to bump up its gross margin despite supply-chain disruption in the period.
Revenue in the three months to the end of February rose by 5% to USD10.87 billion from USD10.36 billion year-on-year. Revenue rose 8% on a currency-neutral basis, led by Nike Direct growth of 17%.
However, an increase in selling & administrative expenses, up 13% to USD3.44 billion, pulled net income to USD1.40 billion, down 4% from USD1.45 billion year-on-year. Diluted earnings per share decreased 3% to USD0.87 from USD0.90.
Earnings decline was despite gross margin widening 100 basis points to 46.6% from 45.6%. This was driven by margin expansion in the Nike Direct business due to lower markdowns, changes in foreign currency exchange rates and a higher mix of full-price sales.
Partially offsetting this were narrower full-price product margins "largely due to increased freight and logistics costs".
Shore Capital believes that JD is set to benefit from Nike's reduced product allocation for retailer Footlocker Inc, a JD rival, amid more emphasis on direct-to-consumer sales.
Footlocker shares were up 2.6% at USD31.79 in early New York trade on Tuesday.
"As Nike accelerates the strategic shift to DTC (it has reduced the number of wholesale accounts worldwide by more than 50%), Foot Locker will see a reduction of Nike's products in its sales mix expected at 60% in 2022, down from 70% in 2021 and 75% in 2020. We see JD benefit from this latest development, particularly outside North America, as no other retailer has been reported to experience such a reduction in the region," Shore Capital's Elenora Dani said.
Further, as the global sneaker shortage appears to be accelerating, Dani said, Nike's withdrawal from the wholesale market means product allocation becomes crucial amid a demand shortage.
Popular footwear, such as Air Force 1 and Air Jordan ranges, are the main categories being hurt by the tightening of supply, but Nike has flagged the beginning of normalisation in the fourth quarter.
"As availability improves and JD is one of the main beneficiaries of the wholesale rationalisation (= getting more products), the company should be able to satisfy the pent-up demand of these products in time for Easter. Meanwhile, other brands with greater depth (ie, adidas, Puma, New Balance) will be pushed to customers as alternative options," the Shore Capital added.
By Arvind Bhunjun; [email protected]
Copyright 2022 Alliance News Limited. All Rights Reserved.
Related Shares:
JD Sports