Popular Brands Deal With a Fickle Chinese Consumer

Eileen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The slowdown in China’s economy has been an issue during all of fiscal 2013 for Nike (NYSE: NKE) and other brands. The company’s first quarter saw heavy discounting due to macro economic pressure and competitive pricing from rivals. Without the right network in place, the company was not able to move its excess inventory to its U.S. factory outlet stores, where demand was much stronger. Camilo Lyon, an analyst with Canaccord Genuity, commented on Marketwatch that the company would probably need three to four quarters to take control of its inventory.

Fast forward to the end of fiscal 2013, ended May 31, Nike reported annual revenues from operations of $25.3 billion, up 11% over last year, and diluted EPS of $2.69. Nike brand revenue rose 8% across each product type and geographical market, except for its Western Europe and Greater China segments.

Greater China earnings before interest and taxes fell 11% for the year and make up 24.7% of total earnings. CEO Mark Parker stressed during the fourth-quarter earnings call that China and North America are Nike’s “two big market stories” and the company is focused on creating long-term sustainable and profitable growth in China.

Is Adidas more attuned to the Chinese consumer?

While Nike maintains it hold of “the premium brand position” in China, Adidas(NASDAQOTH: ADDYY) share of the market is growing. CEO Herbert Hainer states in the first-quarter earnings call for fiscal 2013 that the company is approaching a market leadership position and growing faster than its competitors. To better manage its inventory levels, Adidas closely collaborates with its retail partners and stores to stay informed on what items are selling.

Analysts have stated that the company’s success in China is attributed to the lifestyle and more fashion-conscious brand they are providing the Chinese consumer, who is less interested in traditional sportswear lines. In the first-quarter, ended March 31, Adidas had net income of $394.9 million, up 6% over the same period last year. First- quarter diluted EPS was $1.88, up 6% from $1.77 in the first quarter of 2012. Sales in the Greater China segment were $524.4 million, also up 6% over last year and making up 11% of total regional sales.

Under Armour’s small but expanding presence in China

Under Armour (NYSE: UA) opened its first store in China in 2011, and in 2012, opened three more with additional openings planned. Canaccord’s Lyon stated that the company’s store in Shanghai generated more sales per square inch during Fall 2012 than Nike and Adidas storefronts.

Under Armour’s merchandise is also selling at full price, a sign that the brand is increasing in popularity and, at least in the short term, may be less affected by counterfeit merchandise. Competing with counterfeit goods is a common problem affecting brand retailers in China.

The company’s first quarter net revenues increased 23% to $472 million versus $384 million in the same period last year. Net income decreased 47%, however, to $8 million versus $15 million last year, and diluted EPS decreased to $0.07 from $0.14 in the prior year period.

The drop in income reflects Under Armour’s investments in its biggest global marketing campaign using the slogan “I will,” the opening of the first UA Brand House retail store, and an expanded footwear line. The outlook for 2013 anticipates net revenues of $2.21 billion to $2.23 billion, representing growth of 21% to 22% over 2012. Only 6.5% of Under Armour’s quarterly net revenues originate overseas, but that figure should increase as the company expands to other countries like China.

Conclusion

As the second largest economy in the world, China plays a key role in the profitability and growth of these companies, especially for Nike where a quarter of its earnings originate in China. These companies are currently facing unfavorable economic conditions while they cater to the changing tastes of Chinese consumers, who are becoming more selective in their purchases. Investors should pay attention to how these companies manage their product lines in China, especially Nike’s issue with excess inventory and its possible loss of market share to competitors.

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Eileen Rojas has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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