Nike (NKE) shares have been hammered in the past year, but one analyst thinks the sneaker giant’s inventory problems could ease.
“We are at the beginning of a sneaker supercycle,” Omar Saad, director at Evercore ISI, said on Yahoo Finance Live (video above). “People are wearing more sneakers. They are wearing more sneakers. Their feet are definitely used to the comfort that sneakers and other comfortable footwear provide during COVID and are hesitant to go back to uncomfortable dress shoes on a daily basis, just for special occasions.”
And according to Saad, Nike is “the best positioned company to take advantage of this massive sneaker supercycle.”
Over the past two decades, Nike stocks have consistently outperformed the S&P 500 and have been something of a retail whistleblower. However, the apparel giant’s shares are down 45% so far, trailing the 21% drop in the S&P.
While an increase in demand could give Nike a much-needed boost, it remains to be seen whether it will outweigh the supply pressures from the inventory-soaked retail industry.
“We think it’s going to be a really, really tough holiday [season]and some of this is really about 2023 buying behavior in the wholesale channel,” Adrienne Yih, general manager at Barclays, told Yahoo Finance. “Nike still has about 55% in the wholesale channel, although they are making great strides in moving to [direct-to-consumer]. So that’s kind of the crux of the short to medium term.”
Nike’s performance this holiday season could be in the hands of the biggest household names. The latest shoe from LeBron James’ signature collection, the LeBron XX, is expected to be released just before the start of the NBA season. And December will see a cyclical blitz of retro Jordan brand products, which has seen fans braving the cold weather and camping outside the stores in recent years.
‘Uncertain time period’ in China
In addition to inventory calculations, sneaker brands have experienced a faltering reopening in China, a key region contributing to sales growth.
Nike sales in Greater China missed last quarter estimates as the COVID-19 lockdowns continued to weigh on the company.
“Fourth quarter sales were down 20% on a currency neutral basis and EBIT was down 55% on a reported basis,” said Nike Chief Financial Officer Matt Friend in its June fourth quarter earnings call. “This follows the most widespread COVID disruption in the region since 2020, affecting more than 100 cities and over 60% of our operations.”
The drop in sales could be “a temporary COVID issue in the short to medium term,” Yih said, but it could also be early evidence of a consumer preference for domestic brands in China.
Nike and other brands looking to expand into China, such as Adidas (ADDYY), Under Armor (UA) and Lululemon (LULU), have faced increased competition from domestic brands such as Li-Ning and Anta, which have seen sales growth and rising market share.
“If you look at their first half results, Li-Ning is up 22%,” Yih said. “Anta took a 14% share of the market. You compare that to Adidas, down 35%, and then, for the first half of the year we know, Nike, down 12%. And So we think this is a very kind of uncertain time period.”
Brad Smith is an anchor at Yahoo Finance. Follow him on Twitter @thebradsmith.
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