Nike (NKE) Downgraded On China Recovery Uncertainty

August 9, 2022 11:05 AM EDT
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Shares of Nike (NYSE: NKE) were downgraded to Neutral from Outperform by Exane BNP Paribas analyst Laurent Vasilescu on Tuesday.

Vasilescu, who has a $118 price target on Nike shares, told investors in a research note that redacted targets and increased uncertainty in China's recovery may delay Nike's long-term aspiration.

"In our '20 initiation, Just Margin It, we outlined a scenario in which Nike reaches a mid-teen operating margin by FY23. Nike impressively achieved this target in FY21. Nike then outlined a target to grow revs HSD/LDD and reach a high teen EBIT margin by FY25. Unfortunately, these targets were redacted in the 10K released the other day. Nike is best-in-class, but we move to Neutral due to increased uncertainty that the FY25 targets can be met overtime," wrote Vasilescu.

He added that the targets may be on pause due to increased uncertainty in China's recovery as local brands become viable forces and the sportswear giant facing potential market share losses and increased discounting in its largest market, the US.

"As part of the FY25 targets, China was guided to grow low to mid-teens (fastest region) on the 4Q21 call. We warned China may be challenged through 2022 in Big Trouble in Little China. But now we think pressure may extend well into 2023 as 1) local brands Li Ning, ANTA, Xtep and 361° become more viable players post BCI; 2) Covid policies remain strict; and 3) potentially softer macro. Nancy Pelosi's fly in stunt the other day won't help and may in fact further fuel Chinese nationalism. China's continued challenges put FY23's target of growing revenues LDD on a cc basis and the FY25 targets at risk," added Vasilescu.

Nike shares are down 4.5% at the time of writing.

By Sam Boughedda

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