"With a partial lifting of Covid restrictions in different cities, I am very pleased to report that our recovery in China is well underway," said Belinda Wong, chairwoman of Starbucks China. as its biggest market by 2025 - but it's not smooth sailing just yet. China is a huge part of Starbucks' long-term vision - potentially overtaking the U.S. On Nike's earnings call Thursday night, CEO John Donahoe compared China to inflation in that "we can't completely predict it." But structurally, we see some very encouraging signs with consumers," Donahoe said, adding that Nike's head of China operations, Angela Dong, is "very clear that they're seeing Chinese consumers are emerging from these lockdowns with a real hunger for innovation, quality, and energized storytelling." Donahoe's sentiment is similar to what we heard from Starbucks earlier this month during the company's investor day. Fortunately, our extended investment horizon allows us to be patient. 31 - but it will take time for things to normalize. Not only are the results backward-looking - in Nike's case, they cover the three months ended Aug. Still, we have to remember that just because lockdowns have been lifted, we're not out of the woods with business disruptions showing up in quarterly results. We recognize the types of products the three companies sell vary greatly.
Nevertheless, Nike's results are worth considering in the context of Club holdings Apple (AAPL) and Starbucks (SBUX), two other consumer-focused companies that count on China for growth. We had not forgotten about Beijing's attempts to enforce its so-called "zero Covid policy" and the economic problems associated with rolling lockdowns in major cities. Nike's earnings before interest and taxes (EBIT) in China also fell compared with a year earlier, down 23% to $541 million. While that met Wall Street's tempered expectations, it still represented a 16% year-over-year decline. Nike's sales in China were $1.66 billion in the first quarter. Starbucks & Apple Nike's negative China sales serve as a reminder about the current complexities of doing business in the world's second-largest economy. TJX shares were up more than 1.5% Friday, while Nike shares slumped more than 10%. However, Nike's quarter makes it clear the "plentiful off-price buying opportunities" that TJX Companies has seen have not disappeared yet. Here is the company in its own words, in its 2021 annual report: "With many retailers continuing to close stores and with congestion in the supply chain, we offer vendors an attractive solution for clearing inventory," TJX wrote, adding later that it is "in a great position to take advantage of the plentiful off-price buying opportunities in the marketplace." Nike is likely utilizing multiple approaches to get rid of its excess inventory, including markdowns in their own stores. Off-price retailers such as TJX are the beneficiary of these industry dynamics. They want to get rid of it, even if it means taking the kind of short-term hit to profits that Nike said it's likely to experience. Apparel makers and sellers don't want to hold onto excess goods, especially when more seasonally relevant clothes are on their way. Retail's inventory glut is a key reason why we started a position in TJX, the parent company of Marshalls and TJ Maxx, in late August. The effect is good news for TJX Companies: Nike is taking "decisive action to clear excess inventory," according to Nike CFO Matthew Friend. Nike is not an outlier in experiencing this. The cause is understandable: pandemic-induced supply chain complications, such as late deliveries over the past two seasons and early holiday orders. Its shelves in the region swelled 65% in the first quarter compared with the same three-month window last year. TJX Companies The biggest takeaway in Nike's quarter - and not just for us, but for Wall Street overall - is that the apparel giant has a major inventory problem in North America. While it's a never-ending process, quarterly results and earnings calls are gold mines for these readthroughs. We call them "readthroughs": valuable investment clues we find by sifting through financials and comments from other companies, including ones not owned by Jim Cramer's Charitable Trust, the portfolio we use for the Club. A warning from Nike (NKE) in its first-quarter earnings report has given us some serious insights into a handful of consumer stocks in the portfolio.
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