Nike Inc's (NKE.N) posted a 12 percent drop in first-quarter earnings and orders in China for the next several months fell for the first time in three years, choking off what had been a growth engine for the world's largest sportswear maker.
The slumping orders overshadowed earnings that beat analysts' expectations, sending shares down 3 percent after the market closed on Thursday.
"The (Chinese) consumer is becoming more discerning and sophisticated. At the same time the economy seems to be slowing, creating short-time challenges for retailers," Charlie Denson, president for the Nike brand, said on a conference call with analysts.
"It's a natural evolution we've seen in many markets, so we're not surprised," he said.
Futures orders, or orders of Nike-branded shoes and clothes scheduled for delivery from September 2012 through January 2013, rose 6 percent. In China, futures orders fell 5 percent in the quarter, after rising 27 percent last year.
Nike is the latest global company to be hit by the economic slowdown in China, which has hurt demand for everything from tractors to trench coats.
Companies like Nike have come to count on China and other emerging markets for rapid growth, compared with mature markets like the United States.
"There is a fear, North America is not a growing market, you need China to work," Rahul Sharma, founder and managing director at retail consultancy Neev Capital, said. However, China is still not Nike's largest market.
He said investors were overreacting to the drop in orders from China which were no surprise.
Nike, which already had some excess inventory there, is finding it difficult to tackle intense competition and frequent promotional sales by local brands, while distributors and retailers are wary of the economy.
Some analysts said Nike was doing right in not forcing its distributors to take on more orders in a slowing market, rather taking a short-term hit for long-term benefits.
Finance Chief Don Blair said the company is working towards aligning its manufacturing volume more tightly with futures orders as it "resets" the market, reiterating that China is a long-term growth opportunity for the company.
"The worst thing would be that Nike pressures distributors to pile on stock (to keep futures orders up)," Sharma said.
The slumping orders overshadowed earnings that beat analysts' expectations.
For the quarter ended August 31, Nike earned $1.23 a share compared to $1.36 a share last year. Analysts on average forecast $1.12 a share, according to Thomson Reuters I/B/E/S.
Net income was $567 million, compared with $645 million last year in the same quarter.
Revenue rose 10 percent to $6.7 billion, compared with the average analyst estimate of $6.42 billion.
Gross margins fell to 43.5 percent from 44.3 percent a year earlier. The rate of decline in gross margins has eased from recent quarters as higher prices for Nike products and cost-cutting have helped mitigate the impact of rising materials and labor costs.
Shares of the company, which recently approved an $8 billion buyback program, were trading at $93 Thursday after the bell. They closed at $96 on the New York Stock Exchange.
(Reporting by Nivedita Bhattacharjee in Chicago; Writing by Brad Dorfman; Editing by Phil Berlowitz)