HSBC lowered its rating on Nike Inc. to “Hold” in part due to the recent bump-up in its shares but also because of the likely challenges Nike will face in its plan to aggressively shift away from undifferentiated retail environments.
In a note to clients, Erwan Rambourg, HSBC’s lead analyst in the space, said its planned distribution shift “could remain painful” while its valuation relative to its own growth trajectory as well as Adidas is “not as compelling here.”
On the positive side, Rambourg believes that Nike’s investor day in late October was “very convincing on Nike’s ability to capture future trends to the group’s advantage whether in product innovation, digital experiences and the manufacturing revolution, in our view.”
The moves are expected to support Nike’s goals in the medium term calling for high-single-digit sales and mid-teens earnings growth.
Also benefiting Nike’s business should be a weak U.S. dollar; a strong product pipeline supported by major initiatives in running, its new NBA partnership and the opportunity around upcoming World Cup kits; as well as other investments.
“Our doubts are more on who is the incremental buyer given the positive share price performance and the sell-side positioning (20 Buys, 18 Hold, 1 Sell) and still a somewhat blurred visibility on the short term in the key U.S. market,” wrote Rambourg.
He noted that since HSBC’s last note on Nike that came out on September 13, investor sentiment has become more positive on Nike. Rambourg wrote, “Our more recent conversations point to many giving the management team the benefit of the doubt despite a very guarded external communication. In other words, it seems it has become fashionable to like Nike again.” The valuation on both relative to growth and relative to Adidas “now looks fair.”
On the U.S. market, he pointed to the challenges the brand may face in its goal mentioned at its Investor Day to reduce sales from 60 percent occurring in undifferentiated wholesale accounts in North America to 20 percent in five years. Added Rambourg, “That is very good for brand equity and full price sales but there could be hiccups along the way. Nike’s management mentioned the current US disruption should have a discreet short-term impact in the greater scheme of things and they could be right.”
In the near term, Rambourg also noted that as the U.S. market “does not seem to be very ‘clean’ just yet, the case for over-distribution of the brand can easily be made and communication remains an issue in our view.”
HSBC cut its short-term estimates to reflect expectations of slower growth in the U.S. but maintained its estimates for Nike’s fiscal year ended May 2020.
Photo courtesy Nike
