By Thomas J. Ryan
Nike has been in the news lately over risks the brand may face due to the NBA’s recent controversy in China considering its exposure to the NBA, the basketball category and China. Several favorable Wall Street notes have arrived over the past week, however, touting the brand’s strong prospects.
The positive sentiments come despite the stock climbing 28.0 percent for the year, besting an 18.3 percent gain in the S&P 500 index. Nike’s shares closed Monday at $94.88, up $1.00 since Friday’s close and up from $74.14 at the year’s start.
Bank Of America Merrill Lynch Upgrades Nike On Non-Performance Momentum
On October 14, Bank of America Merrill Lynch upgraded Nike from “Underperform” to “Neutral” as it expects accelerated growth of non-performance Nike “sportswear” and Jordan apparel to offset market-wide softness in “performance” categories.
In a note, analyst Robby Ohmes said he believes the “accelerated democratization” of the Nike brand will offset numerous headwinds Nike has faced over the last three years, including store closures and outright liquidations of multiple wholesale accounts, stagnation in “performance” categories as casual athletic/athleisure momentum has grown and the resurgence of rival Adidas.
Wrote Ohmes, “We now believe the decline in F20 consensus estimates (down 25 percent from a peak of $3.95 in June 2016) is over, marked by F1Q20 EPS upside (on 9/24) led by Nike’s less technical “Sportswear” businesses, including the Air Force 1 classic footwear franchise & Tech Fleece.”
He wrote that Nike’s earnings outlook should now stabilize due to accelerated sportswear growth, supported by women’s and kids’ sportswear apparel and the expansion of “core” (sub-$100) footwear.
The broadening of the Air Jordan franchise well beyond performance and signature basketball footwear and apparel should remain a global growth driver for Nike, especially in China.
Bank Of America Merrill Lynch’s price target was also significantly lifted to $98 from $70 previously. The investment firm argued that Nike’s broadening customer base “supports a global consumer staples valuation (instead of a consumer discretionary branded apparel & footwear company valuation).”
The China/NBA dispute was noted as part of the “risks” to its Neutral rating. Ohmes wrote, “Greater China revenues may become pressured given increased macroeconomic volatility amid recent conflicts between the NBA in China, which could threaten both the Nike Brand and Jordan as well as U.S./China trade war-related issues.”
Susquehanna Sees China Concerns As “Overblown”
On October 8 when news of the China/NBA dispute first surfaced, Sam Poser, Susquehanna Financial Group, wrote in a note that the concerns of a possible China slowdown for Nike are “overblown.”
“The Nike brand remains as strong as ever in China,” wrote Poser. Revenue growth in Greater China has been Nike’s fastest-growing region, increasing an average of more than 20 percent on a currency-neutral basis per quarter over the past two years “and there are no indications that momentum is abating.”
He noted that the basketball accounts for only 12 percent of Nike’s overall revenues and the Jordan, and signature NBA player styles tied to the NBA are likely “far less” of Nike’s basketball mix in China.
Poser also noted that Nike sponsors many athletes and teams in China, and China’s consumers perceive Nike as a global athletic brand, not a U.S. brand. Wrote Poser, “Management has noted in the past that the philosophy since NKE began selling product in China has been to be “of China, for China” vs. strictly being a U.S. brand looking to capitalize on the growth of the Chinese consumer. The philosophy has worked, as NKE has continued to thrive in China.”
Finally, Poser noted that while U.S. companies are migrating manufacturing out of China due to tariffs, Nike is expanding capabilities to meet the growing demand from the Chinese consumer. Investing in China is likely helping Nike gain better terms with factories while “also putting the company in the good graces of the Chinese government.”
Poser reiterated his “positive” rating with a $106.00 price target.
Poser reiterated his “positive” rating with a $106.00 price target.
Cowen Seeing Strong Sell-Through Online For Nike
On October 11, Cowen put out a note reiterating its “Outperform” rating on Nike at a price target of $105.
Cowen’s lead analyst, John Kernan, noted that Nike and Jordan brands appear highly-positioned and consistently through Cowen’s analysis of Footlocker.com and StockX.com sales data, “indicating the brand’s ongoing heat, particularly in premium price points.” Strong receptions to innovations are supporting continued growth in ASPs (average selling prices), he added.
Kernan further wrote that Nike’s management’s “confidence seems as high as we can remember” on its recent Q1 conference call as supply chain and digital investments pay off.
On China’s spate with the NBA, Kernan wrote, “We are skeptical this derails a tremendous region of growth of Nike and Nike brand strength in the region is substantial.”
He further noted that Nike’s strength in the region is supported by its efforts to work with China’s Ministry of Sport and Education’s efforts to encourage more active lifestyles for its citizens, Nike’s strengthening partnerships on Tmall and WeChat, and on-the-ground investments such as the opening of a House Of Innovation store in Shanghai in 2018.
Kernan further noted that Nike set a low-to-mid-teens revenue growth target for China at its 2017 Investor Day and exceeded that target every year.
Oppenheimer Boosts Nike Price Target On Strong Momentum
On October 10, Oppenheimer’s Brian Nagel reiterated his “outperform” rating and raised his 18-month price target to $115, up from $100 as Nike’s shares have climbed close to his initial target.
He cited Nike’s better-than-expected Q1 and the company’s raised gross margin guidance due in part to climbing average selling prices (ASPs) as reasons for his continued confidence. Expense leverage is also expected to start supporting EPS growth in Nike’s fiscal 2021 year as investments in the company’s Consumer Direct Offense should moderate, according to Oppenheimer’s note.
Wrote Nagel, “NKE has improved meaningfully product innovation and is leveraging better a strengthened digital backbone, efforts that are fueling upticks in sales and margins throughout the organization.”
Nagel also believes Nike is “well positioned” to manage any NBA issues in China. He wrote, “Over the past few decades, NKE has developed a substantial business in China, whereby consumers view the brand as more of a local player than U.S. import. Sales in China have tracked decidedly well lately. We are watching any NBA-related issues carefully but, at this juncture, we do not foresee significant risks for NKE.”