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Nike’s China Challenges Cloud Financial Analysts’ Outlook

Nike’s fourth-quarter results may have exceeded expectations Monday, but financial firms like Goldman Sachs and BofA are still hedging their forecasts in light of China-related concerns.

Goldman Sachs lowered its fiscal 2023—Nike’s fiscal year began June 1—earnings per share forecast from $4.57 to $3.51, attributing the downgrade to “the potential for continued Greater China Covid interruptions,” as well as “lower than expected guidance/commentary around gross margins” and foreign exchange headwinds. BofA lowered its F23 EPS estimate by 56 cents to $3.54 “to reflect a slower China recovery and higher SG&A.”

Nike recorded $12.2 billion in sales during the quarter ended May 31, down 1 percent versus the prior-year period’s $12.3 billion. In Greater China, currency-neutral revenue fell 20 percent and earnings before interest and taxes dropped 55 percent on a reported basis.

The company reported a net income of $1.4 billion, or 90 cents per diluted share. BofA said it had expected EPS of 85 cents. Consensus estimates from Visible Alpha and FactSet had predicted EPS of 83 cents and 80 cents, respectively.

Despite the better-than-expected fourth-quarter results, Goldman Sachs lowered its 12-month price target from $155 to $120—just below BofA’s own unchanged price objective, $122. Nike’s share price was roughly $110 Monday evening, before it reported its earnings results. It currently sits around $105. Goldman Sachs listed “high exposure” to the Greater China market as the first of three key “downside risks.”

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“Given Nike’s significant exposure (38% of Nike Brand EBIT in 2021) to the rapidly growing Greater China market, slowing GDP growth in the country, uncertainty around the property market in China (particularly after recent liquidity concerns for Evergrande), and recent COVID-related shutdowns could create a threat to Nike’s top and bottom-line financial results,” its analysts wrote in a note published Tuesday morning.

Goldman Sachs also noted that given the “higher-than-average” growth levels in the Chinese sportswear, sports apparel and sports footwear markets, a slowing of the market there would “limit global growth in Nike’s market size, hurting the company’s financial growth prospects overall.”

UBS, however, offered a more upbeat perspective. In a note published Tuesday, the financial services company declared that the fourth-quarter report did not change its thesis much. “The key 4Q22 learnings reinforce our view Nike has the foundation to drive solid [long-term] EPS growth,” UBS’ analysts wrote. It placed its 12-month price target at $168, well above Goldman Sachs and BofA’s.

Though UBS attributed its optimism in part to its belief that Nike “remains the #1 global sportswear brand, especially in China,” it acknowledged the Swoosh will be negatively impacted by “macro headwinds” in fiscal 2023, including “resetting the China marketplace post 4Q22 lockdowns.” UBS predicted sales growth will accelerate every quarter in fiscal 2023, up to 19 percent in Q4. “The keys are improving momentum in China, global reopening, the 2022 World Cup, lapping the wholesale channel reset, and easy compares as Nike anniversaries FY22’s Vietnam factory shutdowns,” the firm’s analysts wrote.

UBS, like Goldman Sachs and BofA, trimmed its FY23 EPS forecast, but only by 6 percent to $4.05. It attributed the downgrade to slightly lower-than-expected guidance on FY23 sales and gross margin. It also noted management’s tone on Monday’s conference call was “weakened slightly” quarter-over-quarter and remained at “a low level” historically.