Nike’s outlook: International
Nike derives ~55% of its revenue from outside North America. Since the company reports financial results in US dollars, the performance of the US dollar versus foreign currencies affects Nike’s performance. Adidas (ADDYY) is also likely to face considerable global forex headwinds. The appreciation of the US dollar versus the euro should reduce Nike’s revenue from the key US market in terms of euros.
US dollar appreciation
The US dollar is up ~27% versus the euro since the start of 2014[1. Through March 6, 2015]. In the quarter ending February 28, 2015, the US dollar has appreciated by ~11%. Nike derived about $3.8 billion in revenue from its European segments in 1H15.[1. Western, Central, and Eastern Europe] That’s about 24.6% of its total revenue. This is likely to have a significant impact on Nike’s outlook for its reported revenue from these segments, which otherwise appear to have strong fundamentals.
In contrast, the stronger dollar is less likely to affect results for peers Under Armour (UA) and Lululemon Athletica (LULU), since both derive over 90% of their revenues from North America. And while the Canadian dollar has depreciated as well versus the US dollar, UA has limited exposure to the Canadian market. Canada, on the other hand, is LULU’s home market, and the athleisure wear firm will consequently have greater exposure to the depreciating Canadian dollar.
Higher personal consumption
The European Central Bank’s (or ECB’s) bond buying program, which started this month, is also likely to pressure the euro further. However, the program has a silver lining. The additional liquidity and lower interest rate environment are likely to positively affect consumption in the euro area. We’re already beginning to see some of this effect in Germany, the largest economy in the Eurozone. Retail sales in January were up 5.3% year-over-year—the most since June, 2010. On a month-over-month basis, retail sales grew 2.9%—the fastest increase in seven years.
Both Nike and Under Armour are looking to expand their operations in Europe. Higher personal consumption in Europe may limit some of the downside for consumer firms (XLY) like Nike (NKE) and Under Armour (UA), resulting from forex headwinds. It may also benefit German sportswear peer Adidas (ADDYY).
Nike’s outlook: The United States
NKE and UA should also benefit from higher employment generation, rising incomes, and increased consumer spending in the US. Lower energy prices should also result in an upside for consumer spending (XLY)(XRT) both in the US and abroad.
NKE and UA constitute ~0.4% of the portfolio holdings of the iShares Core S&P 500 ETF (IVV).