Shares of NIKE (NYSE: NKE) have tanked 34.4% this year, and the stock is currently trading just above its 52-week low of $103.46 with a closing price of $108 as of June 23. The fall in the stock price has been aggravated by multiple factors, including a volatile macroeconomic environment, rising COVID cases in China, and the subsequent lockdowns over there.
In addition to this, on June 23, according to a CNBC report, NIKE announced that it would be making a complete exit from Russia. Earlier in March this year, the athletic footwear and apparel retailer announced that it would be temporarily suspending its operations at its company-owned and operated stores in Russia following the attack on Ukraine.
These developments have prompted many Wall Street analysts to reduce their financial estimates for the company. Recently, BTIG analyst Camilo Lyon weighed in on these developments. NIKE is expected to announce its fiscal Q4 results on June 27.
The analyst is of the view that the rising COVID cases in China, leading to strict shutdowns in Shanghai and Beijing in April and May, could have hampered the demand for NKE’s products in that country.
NIKE’s management stated on its fiscal Q3 earnings call that while it expected to see its fiscal Q4 revenues sequentially improve quarter-over-quarter in Greater China, it continued to “closely monitor the operational impact related to recent COVID lockdowns.”
China is an important market for NKE, and this region contributed approximately $2 billion in terms of revenues in fiscal Q3. However, on a currency-neutral basis, sales in Greater China declined 8% year-over-year in Q3 to $2.16 billion.
Considering the impact of the lockdowns in China, analyst Lyon has projected sales in Greater China in fiscal Q4 to be down “-25% with ~90bps [basis points] of margin headwind to the company on the negative higher margin sales resulting in our gross margin estimate of 45.8% (flat y/y).”
A Slowdown in Online Sales
Another concern for analyst Lyon is that the analyst’s data tracking has indicated that there are signs of a sharp slowdown in NKE’s direct-to-consumer online channel, specifically in North America. By his estimate, direct online traffic in North America declined 8% in Q4 “driving what could be a low- to mid-single-digit decline in NA [North America] e-commerce sales.”
The analyst also remains concerned about NKE’s “frequency of “at once” orders” to its wholesale partners “perhaps because DTC [direct-to-consumer] has slowed faster than anticipated, thus creating a need to place late-arriving inventory.”
Lyon believes that sales in NIKE’s apparel and footwear category have declined “potentially signaling consumer fatigue online post the stimulus-driven buying spree consumers went on last year.”
In this scenario, Lyon is of the view that a combination of supply chain disruptions, lockdowns in China, and demand potentially slowing down in North America and Europe could “create an inventory glut that will lead to markdowns and pressure margins.”
While the analyst acknowledged that “NKE typically is incredibly well-equipped to manage such disruptions,” Lyon fears that “these issues are just too large to control, even for the best-run athletic brand in the world.”
As a result, the analyst remained sidelined on the stock with a Hold rating.
Other Wall Street analysts, however, are cautiously optimistic about the stock with a Moderate Buy consensus rating based on 15 Buys and seven Holds. The average NKE price target of $142.05 implies an upside potential of 31.5% from current levels.
Bottom Line
While analysts, besides Lyon, are cautiously optimistic about NIKE, it remains to be seen how NIKE, which has run into rough macro headwinds, will face these challenges.
These challenges aside, NIKE scores a strong 8 out of 10 on the TipRanks Smart Score system, which indicates that the stock is highly likely to outperform the market. The TipRanks Smart Score system is a data-driven, quantitative scoring system that analyses stocks on eight major parameters and comes up with a Smart Score ranging from 1 to 10. The higher the score, the more likely the stock will outperform the market.
