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Nike earnings pass a test, but 'there's something going on in China' — and it's not good

·3 min read
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Underneath the surface of Nike's (NKE) better-than-expected quarterly results are lingering supply chain and geopolitical concerns that have Wall Street analysts worried.

Retailers everywhere are contending with supply chain disruptions and COVID-related closures in Asia, something that Nike president and CEO John Donahoe insisted on Monday would put the athletic giant in a better “competitive position” than it was pre-pandemic. CFO Matt Friend added that all factories in Vietnam are back, and have ramped up production to about 80% of pre-closure levels.

Despite Nike's confidence, inventories remain tight and are affecting manufacturing and the delivery of goods. And those problems have been obscured by weakness in China, where revenue tumbled by 21%, offsetting gains in Europe, Middle East and Africa region rose 6%.

The brand’s ability to recover in the world's second-largest economy has become a focus among investors, which analysts say is key to the company’s future growth.

“The decline in China is certainly alarming,” BTIG analyst Camilo Lyon told Yahoo Finance this week.

“It was far steeper than what we had anticipated, a negative 24% decline on a constant currency basis. We were thinking down 13, that's worse than its peers" such as Adidas (ADS.DE) and V.F.-owned Vans (VFC), the analyst added.

'There's something going on in China'

People walk past sportswear stores of Nike and Li-Ning at a newly opened shopping mall in Beijing, China April 16, 2021. REUTERS/Tingshu Wang
People walk past sportswear stores of Nike and Li-Ning at a newly opened shopping mall in Beijing, China April 16, 2021. REUTERS/Tingshu Wang

China’s economy is still struggling as the country slowly recovers from real estate woes and the fallout from COVID-19 lockdowns. With skyrocketing Omicron variant infections thrown into the mix, it could complicate the 2022 outlook.

“There's something going on in China,” Lyon said. “Through our work, we have found that there has been pretty good evidence of really hot releases and launch products that Nike sells out typically in minutes, sitting idle on shelves in China.”

For reasons both political and practical, Chinese consumers have spent less on foreign brands in recent years. They've started to buy more locally, as competitors make higher-quality products and sell them through marketing channels that attract younger buyers.

Lyon cited a "more nationalistic stance that consumers are taking in China to favor domestic brands" as well as COVID-19 restrictions preventing them from buying abroad.

Earlier this year, the Swoosh brand faced backlash after workers boycotted following allegations of forced labor to produce cotton for the country’s western region of Xinjiang. Given rising geopolitical tensions, analysts like NPD Group vice president Matt Powell suggested that the road ahead for foreign brands could be far more difficult in the country.

Meanwhile, Wall Street remains uncertain about the brand's ability to recover in Asia. Bank of America analyst Lorraine Hutchinson expects that sales will gradually rebound, but wrote this week that "the remaining question is when China will return to the double digit sales pace at pre-pandemic company leading margins."

The bank has a "Neutral" rating on the stock, with a target price of $156.98 as the company’s “slower growth and margin degradation in China are offsetting the positive shift to digital.”

Telsey Advisory group analyst Cristina Fernandez is positive on the stock given a strong product pipeline, and a membership program. Telsey's 12-month price target is $190.

Nike's stock, traded on the New York Stock Exchange, jumped by over 6% on Tuesday to close at $166.63.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter: @daniromerotv

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