A new report released by Wedbush Securities casts doubt on Nike’s assertion that it will be able to avoid currency headwinds in the back half of FY20, although the brand is still expected to outperform throughout the fiscal year.
In the report, Wedbush analyst Christopher Svezia said the firm’s data showed that the impact of foreign exchange headwinds in FY20 would likely be more intense than previously predicted.
“While still seeing upside opportunities to CN [China] sales and underlying gross margin, our estimates are being reduced to take into account the higher negative FX [foreign exchange] impact (CNY, EUR, GBP, etc),” Svezia wrote in the report. “In the end, shares may react negatively to reduced revenue guidance and FX is offsetting upside, though NKE continues to innovate and execute with several opportunities (Euro Cup, Tokyo 2020, women’s, sustainability merch, digital, and more) to generate stronger underlying performance than initially guided for FY20.”
In response to these challenges, Wedbush has lowered its sales guidance for the brand from 7.7 percent growth to 6.6 percent growth in FY20, along with reducing its EPS prediction from $2.92 to $2.86.
Along with its full-year financial report, Nike revealed a growing concern regarding currency headwinds during its earnings call in June. However, it still set its expectations at high single-digit currency-neutral revenue growth for FY20.
“We expect currency-neutral revenue growth squarely within the high single-digit range, offset by four points of the FX headwinds,” Nike’s executive vice president and chief financial officer, Andy Campion, said in June. “Based on current FX rates the FX impact on revenue should largely abate from Q2 forward.”
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However, Svezia said new data on foreign currency exchanges will force the brand to reexamine its outlook.
“Given incremental headwinds from a number of currencies (including the CNY, EUR, and GBP), FX now appears to no longer be a diminishing headwind over the course of the year but one that may remain constant (if not somewhat accelerate) at recent rates,” he wrote.
Despite the headwinds, Wedbush still rates Nike as an “outperform” stock due to the numerous initiatives and supply chain advancements it has launched recently. Primarily, Svezia sees the brand’s growth in China as “broad-based” and driven by multiple channels. For example, the analyst said the second-quarter launch of the brand’s SNKRS app in China, combined with the International Basketball Association (FIBA) World Cup falling into the same period, should provide an immediate boost.
Additional launches of the SNKRS app in EMEA have the potential to drive approximately 60 to 110 basis points of overall sales growth annually, according to Svezia and Wedbush, with a chance to outperform.
“The Nike App was launched in 13 additional EMEA countries in Q1 (benefits starting to be realized in Q2 mostly) and the app should launch in China in Q2, per our research,” Svezia wrote. “While management tends to be conservative in their planning around digital initiatives and app launches (likely a source of upside to guidance), our estimates may prove conservative as well.”
Wedbush also expects any tariff impact to be mild for the brand in FY20, estimating that Nike has a mid-to-high-single-digit exposure when it comes to Chinese imports to the United States. Overall, Nike’s advantageous positioning with vendors in Asia and its place as the “strongest merchandise and marketing” brand on High Street in Britain, have Wedbush downplaying any impact it might expect from global trade uncertainty.