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These Trends Could Outweigh Nike’s China Difficulties

After a rough past couple of months in China, Nike could be looking forward to brighter days ahead in the world’s most populous country.

In March, the footwear titan found itself at the center of a state-sanctioned consumer boycott targeting international businesses that expressed concerns about the forced labor of Muslim minorities in the Xinjiang Uyghur Autonomous Region. Despite suggestions that the attention could backfire and help Nike, research by Shanghai-based China Market Research and sales data from the Chinese e-commerce giant Tmall indicate the company took a hit this spring.

In spite of these headwinds, Jefferies released a note Tuesday upgrading its rating for Nike’s stock from “Hold” to “Buy.” The investment firm said it had “grown increasingly confident in the -term growth and profitability trajectory” of Nike’s business, in part because of what it called “a massive growth opportunity” in China.

Jefferies acknowledged the “near-term headwinds” associated with Xinjiang, but said it believes Nike’s China sales will continue to grow by double-digit percentages in the years ahead. It cited an increased interest in wellbeing, a growing and more affluent Chinese middle class, higher direct-to-consumer penetration and leading brand awareness and preference among young consumers as reasons for its optimism.

The firm specifically highlighted growing capital spend on sportswear products within the country. China’s per capita spend in the segment, Jefferies said, has already grown from $4 in 2007 to $13 today. According to data it cited from Euromonitor, that total is expected to rise to $26 by 2025.

Jefferies also pointed to larger economic and demographic trends that could benefit Nike in the medium-term. “Firstly, there are ongoing signs of a developing and consolidating middle class that could reach 700M people by 2022,” it said. From 2010 to 2020, it added, gross domestic product per capita grew from $4,500 to $10,500. By 2025, it is expected to reach $16,000. The firm also noted the Gen Zers and millennials who are entering or are in their peak spending years now have shown more impulsive spending behavior that would benefit brands like Nike.

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Nike’s China revenue for the fiscal year ended May 31, 2020, totaled $6.7 billion, making it the company’s third largest region after North America and Europe, the Middle East and Africa. This compared to $3.8 billion in fiscal 2016.

Jefferies said it is projecting fiscal 2021 sales in the country will total $8.7 billion. The firm also projected that the region will grow to become 23 percent of Nike’s global mix over the next three years, nearing EMEA’s 26 percent. At year-end fiscal 2020, China accounted for 19 percent of the company’s mix.

An increased interest in health and wellness—one trend that Jefferies used to support its optimistic China forecast—will likely be a factor worldwide, as well. Given the strong correlation between severe Covid cases and poor health, Jefferies said it believes the pandemic is amplifying consumer interest in physical activity and fitness. When restrictions ease, it added, increased activity will result in higher demand for performance apparel and footwear.

Jefferies noted several possible scenarios that could weaken Nike’s growth, including increased penetration in North America by Adidas and other competitors; slowed growth in China if consumers turn to local brands; a worsening promotional environment; and an unexpectedly prolonged Covid-19 impact.

What’s more, Nike is poised to capitalize on changing attitudes about what constitutes workplace attire. The majority of consumers, at 70 percent, “expect to dress more casually once they return to on-premise work offices compared to the period prior to the pandemic,” Jefferies noted, citing NPD Group research. Those who will retain their work-from-home arrangements after offices reopen will have little reason to give up the comfortable clothing they’ve lived in for the past 14 months.