10 Reasons Why We Downgraded Nike (NKE) to 'Neutral' from 'Buy' - Citi

April 20, 2021 8:26 AM EDT
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Price: $135.93 +1.74%

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    42 Buy, 8 Hold, 2 Sell

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Citi analyst Paul Lejuez downgraded Nike (NYSE: NKE) to “Neutral” from “Buy” today and lowered the price target to $140.00 per share from the prior $160.00, citing “near-term pressure on sales/margin due to a slowdown in demand in China related to the Xinjiang cotton issue.”

Although Lejuez still maintains its positive long-term outlook on NKE amid the growth and margin expansion story, the analyst says the company is one of the few companies in the bank’s coverage that is facing potential pressures.

“While it is hard not to like this one-of-a-kind brand in the attractive active category at a time the consumer backdrop is strong, there are some items near term specific to NKE that we believe create a more balanced risk/reward over the next twelve months. We discuss these items below, which form the basis of why we believe there are reasons to move to the sidelines on NKE,” Lejuez writes in a note.

Moreover, the analyst projects that a big step up in SG&A investments in F22 will drive lower margins relative to consensus.

Lejuez also shares 10 reasons why he moved to the sidelines on NKE.

  1. China cotton issue: the Xinjiang cotton controversy a near-term risk in China;
  2. Chinese wholesale accounts feeling impact: YY sports saw flat growth vs. F19 in March vs. +16% vs. F19 during the combined Jan/Feb period;
  3. Inventory may remain elevated: Supply chain delays, EMEA store closures and a potential China slowdown could drive elevated inventory beyond 4Q21;
  4. Higher markdowns a risk: A slowdown in China and ongoing store closures in EMEA may lead to higher markdowns;
  5. Demand creation to bounce back: Was artificially low in F21, and China situation may require more SG&A spend to improve brand status;
  6. EBIT margin likely lower than cons in F22: Higher SG&A/GM pressure could drive lower EBIT margin yr/yr in F22 (cons is looking for up EBIT y/y);
  7. FOMO in active category: A lot of new players are entering the active category, which could take share away from NKE or pressure GM;
  8. Stock a bit crowded: Screens as 2nd most crowded name in retail;
  9. Valuation near all-time highs: NKE trades at 25x consensus F22 EBITDA; (27x our #s) vs its 5 year historical avg of 19x;
  10. Better alternatives to play recovery: In a rising tide environment (where many have big sales/EPS upside), Citi thinks NKE numbers need to come down.

The price target moving lower reflects lower estimates:

“F21/F22E from $3.28/4.06 to $3.08/3.42, reflecting a lower sales outlook in 4Q21/F22 due to the China situation and a lower F22 EBIT margin driven by higher SG&A spend,” the analyst explains, before adding that a new price target “implies an F22E EV/EBITDA multiple of 27x.”

Shares of Nike are down 1.7% in pre-open Tuesday.

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