English: Chinese gymnast Li Ling, who won three gold, two silver and one bronze medal at the 1984 Summer Games in Los Angeles, carries the Olympic Torch while descending from the rafters after running around the upper rim of the Bird’s Nest National Stadium during the Opening Ceremony of the Summer Olympic Games in Beijing on August 8, 2008. (Photo credit: Wikipedia)
Sept. 14
China business : given the excess athletic inventory and discounting that is pervasive across the market. Undoubtedly, NKE holds a strong leadership position in the country; however, it is becoming overshadowed by macro pressures and a highly promotional competitive landscape. That said, we believe NKE’s China futures orders will belie the reality we saw, principally because NKE’s distributor partners are incentivized to increase orders despite clear signs that the market needs time to digest the overflow of inventory.
We believe decelerating demand is hindering the pace at which NKE can work down its own sportswear inventory as evidenced by 25%-30% discounts we saw. The lack of an established factory outlet network does not help matters. At the same time, local players such as Li Ning and Anta are contributing to the industry’s issues as a result of their own glut of athletic inventory and subsequent rampant discounts. Add to this, Li Ning’s new rationalization strategy which includes closing 3,000 of its 8,000 doors of distribution. We would not be surprised to see the current level of markdowns (ranging from 30%-60% off apparel and footwear) to persist for some time. No brand, not even NKE, is immune to this level of discounting, in our opinion. Realistically, we believe it could take 3-4 quarters before NKE has its inventory under control in China.
UA’s China position is in nascent stages but early signs are encouraging
After our meeting with Under Armour (UA : NYSE : $56.54 | BUY) in Shanghai, we believe the company is on the right path to building a strong brand by staying focused on telling the performance story. Early encouraging signs include: (1) the brand is selling at full price, (2) footwear is 2x the mix in the US suggesting footwear is improving nicely, and (3) the UA store is more productive per foot than the nearby NKE or Adidas stores. While there is much work to be done, it appears like UA is clearly off to a good start in China.
UGG is not well known, expensive, and must compete with strong counterfeits
While Deckers Outdoor Corporation (DECK : NASDAQ : $38.71 | HOLD) is investing in the UGG brand by opening retail stores in China, we believe there are issues it must contend with first to ensure viability of the brand. Most glaring to us was that the price-value relationship must be better explained (tall classic in China $400 vs. $195 in the US). As such, it is likely that growth in China will be slow and expensive.
