Nike Sinks After China Sales Plunge, Delaying Turnaround

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1:02Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. One of the big losers in today's session so far is Nike down nine and a half percent right now. quite a bit going on there. So let's bring in Poonam Goyal, the senior U.S. e-commerce and retail analyst at Bloomberg Intelligence. Poonam, Nike is in turnaround mode. Elliot Hill is no longer a new CEO. He's just the CEO because he's been there for about a year.

1:45How is his effort to turn this company around shaping up? I think his efforts to turn U.S. businesses shaping up quite nicely. We are seeing momentum rebuild in the U.S. The issue is outside of the United States, in China specifically, where sales have really plunged. And we don't think that they can quickly rebound those sales anytime soon. It may be a 2027 story to see any resurgence in China, if that. What is the issue in China? Is it their brand specific? Is it the Chinese consumer? What's going on there? I think the biggest issue is brand specific. So unlike in the US, the Nike brand isn't perceived as a higher-end athletic brand.

2:32In fact, it sold way too much in off-price and at discount. So the brand needs to build brand momentum and brand heat. And yes, the Chinese consumer isn't particularly on its best feet right now. But if you compare what's happening in China and you look at Lululemon, Lululemon has had outstanding results in China, much smaller, but they've been able to do really well there. So Nike really just needs to get stuff together when it comes to product branding and marketing in that region. What is the playbook for that? Have they detailed, have they outlined something that sounds reasonable or is it kind of still throwing things at the wall?

3:11I think the playbook will be similar to what they did in the US. The first thing that they've done so far, and we'll see how that works out, is changed the reporting structure. So now all regions report directly into Elliott Hill. So I guess he just has more authority over those regions saying things firsthand. The other thing that they're going to try to do is just clean house there. They have to get rid of the inventory that's just not speaking to the customers and has been aged for some time. They have to get out of off price and they have to stop discounting. And then once you get new product to flow in, you get the right brand message across.

3:48It's retail playbook 101. They just need to execute. So execution is huge here. Talk to us about the Converse brand within within the Nike household there. Yeah, so, you know, the Converse brand, yes, it's struggling, but to me, it's less of a concern than China. The brand is less than 10 % of their total revenues from what we see. And while sales are down and while it is a brand that we'd like Nike to see step up, especially when it comes to lifestyle, other companies have done particularly well there. We'd say the focus, you know, if I needed them to focus on one thing first, it would be China right now, Converse after that.

4:26And that's what we're looking for. And I know that there's been a lot of discussion between performance and lifestyle over at Nike. What is the path forward for Nike? I mean, has it chosen performance across all of its markets or are some markets better for performance versus lifestyle? So they're sticking to performance. And I think that's the right choice because performance is what Nike is about. It is what drives the sports momentum. What we'd like to see happen is that performance turns into lifestyle. So a lot of shoes that are worn for the sport or for the game have become lifestyle shoes, too.

5:03So that's a natural shift that we'd like to see with the new innovation that Nike is launching. So we have some experience now, nine months, 10 months, 11 months of just tariff discussion. I think you were one of the first analysts we talked to to say, oh, boy, what's this going to mean for various industries? What's it mean for your business, the athleisure business, kind of the Nikes of the world, the Adidas of the world? Yeah, so footwear is largely imported into the U.S. and so is apparel. When you think the athletic wear space, notably the footwear, it's predominantly made in Vietnam. And the current tariff there is 20 percent.

5:41It will have an impact on margins. In fact, Nike's gross margin, if you look at it, even what was recently reported, more than half of it was due to tariffs. and same with their guidance. So I think 20 % exposure, they are increasing prices selectively. They probably will have more efforts in place in 2026. That's calendar 2026 to mitigate some of this, but it's not going entirely away. It is a headwind to margin. Stay with us. More from Bloomberg Intelligence coming up after this.

6:15You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. All right. A bellwether for some, including myself, for the U.S. economy is FedEx. FDX is the ticker. They reported some numbers. Stock trading a little bit lower here. They had some issues with some of their aircraft, but I don't know. I kind of think it's just an awesome company. The stock is up about, it's about flat this year. It hasn't really done anything here, but it's got a market cap of$67 billion.

6:53I've always been a big fan of FedEx. The MD-11 is a great aircraft, but it's an old aircraft, and they have some reliance on that. Lee Claskill does this stuff for a living. Senior Transport Logistics and Shipping Analyst with Bloomberg Intelligence. Lee, I know FedEx reported some numbers. What did you learn? Well, I mean, their second quarter, they performed pretty well. And they gave us some color about the peak season. Peak season from an average daily volume growth, they're looking at mid-single digits. That could increase to high single digits because there's one extra operating day in the quarter or during peak season, I should say.

7:32So, you know, they seem to be executing on their restructuring plan. The problem is, is that in their second half, they're going to be having a lot of headwinds that they're going to have to deal with. And those headwinds relate to higher variable compensation expenses and a less than truckload market, which they're the biggest player in that market that has been pretty depressed over the last couple of quarters. And it's probably continued to be depressed. And then you have, as you mentioned, the grounding of their MD-11 fleet following the tragic accident of a UPS plane a couple of weeks ago.

8:09So, you know, you add those three things up plus some other things. It's about a 600 million headwind to its earnings. So they have to deal with that. And some of the restructuring that they've done, probably, you know, you're probably not going to see hit the bottom line, at least really directly until their 2027. So the 600 million dollar charge clearly not impressing investors, even with the beat in the quarter that ended. Is this a one-time thing or is this something that could drag out beyond the second half of this year? Next year, excuse me. Yeah, so on the MD-11s, I think expectations are, you know, they should be back in service sometime early next year.

8:51I don't really know exactly when that's going to happen. But so you could view that as a kind of a near-term headwind. The variable compensation, you know, that also is against difficult comparisons. So that's also short term in nature and not not something that is could continue. The biggest unknown for me, at least, is the less than truckload demand. The ISM Manufacturing Index, which has been contraction territory for 35 out of the last 37 months, is indicating that less than truckload demand, which is mostly industrial manufacturing, is going to continue to be weak in the coming months ahead.

9:31because that index, the ISM index, is really a bellwether to an early indicator of where LTL demand is heading. Lee, as you know, I am an expert on trucking. I know what LTL means and TL means. I had no idea that FedEx was the largest LTL provider. Do you like them that they're in that business or would you rather them farm it out to somebody? Well, that's a great question, Paul, because they're planning on spinning that out in June of next year. Boom, banker. Yeah, there you go. You know, they the argument always was that, you know, maybe they could cross tell their LTL and get more profitable parcel business.

10:15That model really might have not played out as much as as as they hoped. And so they also hope to get a better valuation because that LTL business, while it's been pretty depressed, it does trade at a higher multiples. And so they're trying to unlock kind of some of the value there. So, you know, it'll be pretty interesting to see how that company operates as a standalone provider. That industry is pretty consolidated and has a lot of pricing discipline. And we just hope that, you know, once FedEx rate gets out there and they're on their own, they're not going to try to use pricing to, you know, gain share.

10:52But we would note they are still the largest player. So it's not like they're looking to gain a lot of share anyway. So but, you know, it will be an interesting thing to see once that once that gets spun out in June. You know, I'm looking, Paul, excuse me, Lee, I'm looking at Paul and talking to Lee. In the past six months, FedEx shares up about 29 % total return versus UPS up almost 6%. Can you compare and contrast their approach to some of the macro challenges that faces the industry? Yeah, so they're both in the process of restructuring their networks to deal with the new realities that, you know, B2C or e-commerce is really where the growth is going to come from.

11:36And these networks were created a long, long time ago with the idea that, you know, a carrier would go to a lawyer's office with 100 envelopes, drop off those envelopes and pick up 50 envelopes. And that density really can drive profitability where, you know, as you know, if you get like, you know, if you order rubber bands from Amazon, that one package that goes to your doorstep is a lot more expensive to deliver. So they're just dealing with that reality and they've been slow to kind of change their networks. And UPS and FedEx are both in that process. You know, UPS has done things a little earlier, I would say.

12:16And, you know, whether it is they spun out or I should say sold their less than truckload business, the TFI, a Canadian provider, you know, a couple of years ago. Right. They're all looking to try to gain more share of the small and medium size. Right. And get away from the large shippers like Amazon, which really aren't that profitable. Stay with us. More from Bloomberg Intelligence coming up after this.

12:46You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Scarlett, I have breaking news. You may want to get the red headline ready for this one. Okay, tell me. Today, I put a deposit down on my first cruise ever. What? What prompted this? Well, my partner, my girlfriend, she's, we're going. We're doing it in the fall. She just told you. Viking cruise. Yeah, basically. Viking cruises, Europe, France in the fall.

13:20And how are you feeling about this? I'm a little nervous, but it's baby steps, she says. It's not like a big carnival cruise. We got like 5 ,000 people on. It's a little riverboat, you know, kind of cruise. OK, so in two years, we should look for you on a carnival cruise. Could be. Could be. But that brings us to our next guest. I mean, Brian Neger, he's reading the research note right now as we speak. Sweeney, in the cruise business. Brian Neger, he's a senior gaming and lodging analyst for Bloomberg Intelligence. Brian, we had Carnival Cruise Lines reported some numbers today. What did they have to say?

13:47Yes, I mean, the fourth quarter, the fiscal fourth quarter, ended November 30th, was a pretty decent quarter in terms of yield growth. And I think more importantly, going to next year, they are expecting to see about 2.5 % revenue yield growth or so with good cost control. And that's encouraging because there were some concerns that industry growth of supply, particularly in the Caribbean, not by Carnival, but by its competitors, might dampen yield growth going into next year. So while there's still some uncertainty, I think overall the takeaway was fairly encouraging on that front. How much of their business depends on converting people like Paul Sweeney from a never cruiser to a maybe cruiser to a, you know, a reliable cruiser?

14:32Basically increasing their market share by bringing in new customers. Yeah, historically, it's been a big factor in North America trying to attract that first time cruise customer. It's far less penetrated than other forms of vacationing. That's even more true if you go into other parts of the world like Europe and Asia. But it's definitely part of that, that first time customer. On the other hand, you know, much what they do depends on loyalty programs and getting repeat business as well. So, Brian, give us the consumers kind of wavering a little bit there. I mean, the K-shaped economy. How does the cruise industry deal with that?

15:09Because I know there's different tiers of cruising out there. How do you see that in the cruise business? I mean, if you go back historically, the cruise industry is moderately cyclical, probably yields have been more resilient than, for example, business travel oriented hotel room rates. So, you know, there are some obviously some vulnerability. But that being said, the leisure consumer, the leisure consumer of travel has been really resilient and held up extremely well throughout this period of economic uncertainty. Historically, passenger growth has kept up with supply. I mean, the good news for Carnival is they're only looking at about 1 % supply growth in 2026.

15:50There's certainly more coming from their competitors. But, you know, that supply out for them specifically is a healthy backdrop, even if we do see a setback in consumer spending. Speaking of their competitors, I'm just looking at a comparison chart of all the big cruise operators. And Paul's Viking is up about 64 % so far this year. Carnival up about 23 percent. Norwegian Cruise Line down 11 percent and Royal Caribbean up 30 percent. How are their strategies different? I mean, for those who don't cruise, it might seem like they're all one in the same. Yeah, I think there are different ways you could interpret those disparities in stock price performance.

16:27But I think the way I think about it is Vikings certainly very focused on the luxury kind of niche cruise segment. Paul is fancy. Good for Paul. and I think generally speaking that part of the business has held up well you know Carnival probably is is maybe gained some note because it's done a good job at achieving its return on invested capital goals done so sooner to get to that 12 percent range than they expected and because they've got so little supply growth that does provide a little bit more conservatism but you know there there there are certainly some differences across the brands All right, Brian, how are my friends on the strip in Vegas doing these days?

17:10Yeah, I mean, Vegas is finishing up the year with modest growth, but it's been a tough, it was a tough summer period in Las Vegas, particularly kind of the mid-market segment. segment. Much like I said about cruising, the high-end business, high-end hotel business, luxury-oriented demand is held up better. But the mid-market, mid-week demand during kind of shoulder periods and the mid-market has experienced some disruption, probably because of construction, probably because of difficult comparisons, probably because we are seeing that luxury end of the market holding up a bit better. So is everyone then going to double down on chasing after the luxury customer?

17:54Yeah, it really depends on what part of the business companies are in. On balance, Wynn, which is more high-end, has performed better in terms of its rep par, let's say, in Las Vegas than some of its rivals. But, you know, those are these, obviously, these trends shift. But I think that's been notable across the leisure travel sector is the relative outperformance of luxury high end with perhaps a little bit more challenging comparisons and difficult conditions for kind of the mass market or those dependent on other sources of business. And we know that these gaming companies, these casino companies rely a lot more on China than they do on the Strip overall.

18:36How's Macau looking for them? So, I mean, Macau has been recovering, you know, particularly the what we call kind of the mass business in Macau that has some ancillary effect on Las Vegas as well. Although low luck levels and Bach right in Vegas have been a bit soft in some periods this year. But that business is certainly coming back in Macau. It's coming back a lot after obviously the pandemic. It's a different type of business. Stay with us. More from Bloomberg Intelligence coming up after this.

19:14you're listening to the bloomberg intelligence podcast catch us live weekdays at 10 a.m eastern on apple car play and android auto with the bloomberg business app listen on demand wherever you get your podcasts or watch us live on youtube a new story that's got a lot of people's attention like my kids are paying attention tiktok is being bought by a group of buyers led by oracle corporation with the company and byte dance signing binding agreements to create a u.s joint venture. I don't care, but a lot of people do. Mandeep Singh, senior tech analyst for Bloomberg Intelligence, joins us. Mandeep, talk to us about this structure here.

19:50I know that the government was either to ByteDance, which is a Chinese company, either sell this thing or shut it down. Does this satisfy kind of the requirement here? I think so. And look, the main point of contention was the algorithm. So clearly, you know, there is a decoupling of that versus the app. And And, you know, in terms of the ownership, Oracle was the most likely sort of candidate when it comes to leading this joint venture. And that turned out to be the case. So from that perspective, I do think this should be palatable to both the U.S. and the Chinese government. Although we don't know if the Chinese regulators will definitely approve it, right?

20:36They have yet to say whether they'll approve this transaction. I mean, we have seen that many times. A lot can go wrong. But in this case, at least, you know, the joint venture that was formed here had the blessing of the U.S. government. So it sounds like, you know, this was the intended proposal. And that's how it turned out to be in terms of ByteDance, you know, agreeing to sell the app to this joint venture. What I like about this is it includes Silver Lake. And from my money, based on my career, the smartest technology PE money out there by far is Silver Lake. Some really smart folks there.

21:16So if they're involved, it's got to be a good deal. That's how I look at it. Mandy, talk to us about what the competitors are thinking here. Is TikTok still as formidable going forward, do you think, as it has been? Not really. I mean, if you look at the run rate of Instagram Reels, they have surpassed$50 billion in run rate. That would have been unimaginable given the kind of lead TikTok had over Instagram and Instagram Reels came from behind. And now they have a$50 billion run rate. Same thing with YouTube Shorts. They have an engagement share that's almost surpassed TikTok at this point of time.

21:59So clearly, you know, the last couple of years, TikTok seems to have lost steam when it comes to the pace at which they were adding users and the engagement growth, etc. And if I had to ballpark, you know, the U.S. revenue of TikTok would not be, you know, over 12 to 15 billion dollars. So Reels being at 50 billion dollars just goes to show what kind of a missed opportunity that was for TikTok. Interesting. So what does this mean for Meta, which owns Instagram and Reels and, of course, is now firmly in the lead and is no longer playing catch up to TikTok? I mean, a lot of this, you know, revenue ramp up for Reels was driven by the fact that, you know, Facebook or Meta had a better ad stack and they kept, you know, improving that with more personalization.

22:53Now with applying generative AI on top of that, that has helped them with ad pricing. So these are incremental things where TikTok, you know, couldn't even keep its algorithm. So the fact that they have to redo the algorithm, redo the ad part, the personalization part is likely the reason why their ad revenue hasn't ramped up. And it's going to take them a while, even if, you know, this joint venture would start putting money into the company to, you know, improve its algorithm and personalization. I don't think it's going to happen that quickly in terms of where they were, you know, two, three years back.

23:36Should we expect this new joint venture to maybe go public at some point? Oh, still early days, I would say, given the algorithm change is a big one. I mean, you have to, even though, you know, users are used to coming to the app, you have the traffic. But we know in the world of AI, it's about personalization. It's about that recommendation system. And, you know, rewriting the algorithm, I do think it's going to take a while. And it comes down to, you know, what kind of talent they can attract into this new entity. So a lot has to go right before, you know, we can look at this joint venture going public anytime soon.

24:20That would be really interesting. I'm still going to go make the pitch. If I were back, I'd be right on the doorstep today. No doubt. I want to be the first guy there and saying, let's take this thing public. Here's what you need to do. And you think they're ready. This is something that they want to do. I don't know. I would think so. I mean, I can bring a lot of money. Is the administration going to play a role in that? Oracle would focus a lot more on their cloud business right now and the ramp up there. I don't think they have the time to focus on reviving TikTok. This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, and anywhere else you get your podcasts.

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