Analysts at Jefferies downgraded Nike, Foot Locker and Urban Outfitters as its survey data shows the resumption of student loan repayments could force families to limit spending on apparel and sneakers. Jefferies also expects Nike sales to feel the pressure of lean inventory disciplines across wholesale channels and macro headwinds facing China.

Jefferies analysts led by Randy Konik reduced Nike to a “Hold” rating from “Buy” while slashing the company’s price target to $100 from $140. Shares of Nike closed Monday at $90.59, down 26 cents.

Jefferies also reduced its estimates for Nike’s fiscal year ended May 31, 2024. Konik wrote that while retail inventory levels had improved industry-wide in the second quarter to down 5 percent year-over-year, tight inventory management through at least the end of 2023 is likely to reduce replenishment orders and pressure Nike’s wholesale channel.

At the same time, Konik wrote that while Nike’s ongoing focus on increasing direct-to-consumer (DTC) sales would likely expand margins over time, “the current consumer environment could push out the timing of this expansion,” risking Nike’s target of reaching a high-teens operating margin by fiscal 2025.

In the fiscal fourth quarter ended May 31 on a currency-neutral basis, Nike Direct revenues were $5.5 billion, up 18 percent on a currency-neutral basis, with 14 percent growth in Nike Digital and 24 percent growth in Nike Stores. Wholesale grew 2 percent on a currency-neutral basis to $6.7 billion, moderating as planned to reduce elevated inventories.

Nike’s growth has improved in China in recent quarters but heightened macroeconomic headwinds in the region are forecasted by Jefferies to challenge near-term growth. Konik wrote, “We think NKE’s sales trends in this region could be choppy given the recent slowdown in apparel retail sales in China.” Jefferies is now modeling growth of 7 percent in China for Nike for FY24 versus consensus targets of 12 percent.

Konik also noted that Jefferies’ recent survey of more than 600 U.S. consumers with outstanding student loan debt indicated that consumers will likely curtail spending as repayments start back up. Notably, 87 percent of respondents said they are “somewhat concerned” about being able to meet all of their monthly expenses, while apparel, footwear, accessories, restaurants, and big-ticket items are likely to see the biggest pullback in spending. To this end, 54 percent of respondents said they plan to spend less on apparel/accessories, 46 percent plan to spend less on footwear, 51 percent plan to buy fewer items or shop less frequently for apparel/accessories items, and 48 percent of respondents feeling the same about footwear.

Lululemon, Foot Locker and Urban Outfitters are the most exposed to weaknesses connected to student loan repayments among Jefferies’ coverage in the space. However, Jefferies’ survey also showed that 39 percent of respondents plan to buy less-expensive alternatives within apparel/accessories and 35 percent in footwear. Konik wrote, “We believe these results suggest that NKE could face incremental headwinds in higher-priced areas of its assortment.”

In a separate note, Jefferies lowered its rating on Foot Locker and Urban Outfitters to “Hold” from “Buy” due mainly to the student loan exposure that “could be a catalyst that weighs further on already soft sales at some of our specialty apparel coverage.”

Konik cited a “continued tough consumer environment, expected top-line headwinds from younger consumers, and continued pressure in the athletic wholesale market.”

Jefferies’ price target was lowered to $18 from $28 on Foot Locker and $31 from $42 on Urban Outfitters, while estimates for FY25 were trimmed. Konik wrote, “Coming into this year, we believed FL’s new mgmt would help to reaccelerate the business, but the turnaround has been slower than we anticipated. In regard to URBN, we see headwinds to its top line that could persist through F’25.”

On Monday, shares of Foot Locker closed at $17.44, down 32 cents, while shares of Urban Outfitters ended the day at $31.75, off 15 cents.

Photo courtesy Nike