With Li Ning’s preannouncement about high inventories and weak orders, it’s easy to jump to conclusions. But when you quantify one business vs. the other, it opens up the question as to whether Nike is causing Li Ning’s problems, not sharing them.
Let’s put some context around Li Ning’s (top local athletic footwear brand in China) preannouncement yesterday, and what the numbers really mean for Nike. The bottom line is that it’s definitely not a positive data point. But in really looking at the size of Nike’s business in China as well as its previously disclosed inventory position, it makes perfect sense that the little guy got crushed. In fact, we’re surprised that we have yet to see the same out of Anta.
Consider the following:
- Nike China will clock in about $2.6bn in revenue this year, double that of Li Ning.
- Nike, however, leverages that into $900mm of EBIT, compared to $70mm for Li-Ning. Even if we adjust for 15% opex infrastructure given that Li Ning is based in China and Nike carries much of its costs out of the US, it’s still churning out EBIT at 5x the rate of Li Ning.
- Nike ended last quarter with 32% growth in inventory. That’s an incremental $820mm yy. This was heavily weighted to China and Europe. China alone accounted for 13% of Nike inventory growth.
The bottom line is that Nike’s yy growth of $104mm in inventory in China is 1.5x the size of the ENTIRE profit stream generated by Li Ning. Is Nike in the same boat as it relates to Chinese growth slowing? Sure. But a) slowing to the mid-20%s ain’t half bad, and b) we have to consider that Li Ning’s preannouncement was CAUSED BY Nike, instead of being in conjunction with Nike.
