Sunday, October 15, 2017

Nike's Sales in China Come at the Expense of Cash Flow.

Nike, Inc. (NYSE:  NKE) revenues in Greater China grew 8.6% in the three months ended August 31, 2017, compared to the same period last year. The company gave details on accounts receivables, inventory, fixed assets, product types, and distribution channels within Greater China. Even though the company’s sales have grown faster than Mainland China’s gross domestic product and have exceeded the consumer price index for apparel, the company did so less profitably with significantly higher pressures on cash flow.

Of the US$1.1 billion in sales that Nike, Inc. generated in Greater China during the three months ended August 31, 2017, footwear accounted for 68.6%, apparel accounted for 27.8%, and equipment accounted for the balance. Apparel sales grew twice as fast as footwear sales. Equipment sales were negative. Even though the company increased sales by 8.6%, EBITDA only increased 6.2%. This means the company is growing sales by reducing margins, not capturing more value or benefiting from economies of scale.

About two-thirds of Nike, Inc.’s sales in Greater China are sold to wholesale customers, whereas the balance goes to direct customers. Sales to wholesale customers increased only 5.0%. Despite this slower growth, accounts receivables increased 24.4% over the same period. Sales to direct customers grew 16.3%. This is an impressive growth rate, but it must have fallen below the company’s expectations because inventories increased 25.5% over the same period. Although sales are increasing, the company is having to commit proportionally more working capital to support these sales. One positive aspect is the fact that property, plant, and equipment only increased 2.2%, which is much lower than the increase in sales. Asset utilization improved over the period.

Nike, Inc.’s sales in Greater China for the three months ended August 31, 2017 exceeded overall economic indicators and industry-specific indicators for comparable periods in Mainland China. However, the company captured these sales at a lower EBITDA margin and committed working capital at a higher rate than the comparable period last year.