Is Nike’s growth chapter in China coming to a close?

What Happened: Nike’s stock price fell 10.85% over the month to June 13, lagging the S&P 500’s gain of 5.41%, according to Zacks Equity Research.

Nike may not be able to meet its long-term target of high-single-digit sales growth due to Western brand boycotts and local competition in China, according to a report by investing community Seeking Alpha.

The US-based footwear giant, which derives 17% of its global sales from China, continues to face a backlash from local consumers after taking a stand against Xinjiang-made cotton in March 2021. Pou Sheng, a major wholesaler for Nike in China, has reported slowing sales growth over the past two years. 

Meanwhile, in the fiscal year ended May 31, 2022, Chinese competitors Li-Ning and Anta achieved quarterly sales growth of 15% or more while Nike’s Greater China sales growth remained negative—down as much as 24% in the company’s Q2 2022 (ended November 30, 2021).

Given these factors, analysts suggest that investors avoid investing in the sportswear name. The Zacks Rank system, which ranges from one (strong buy) to five (strong sell), ranks Nike three (hold). 

The Jing Take: Prior to the Xinjiang cotton controversy, Nike’s business in China was booming. In the fiscal year ended May 31, 2021, the company recorded its seventh consecutive year of double-digit, currency-neutral growth in Greater China.

In the three months ended February 28, 2023, Nike saw a slight improvement in the country, where its revenue climbed 1% on a constant currency basis (down 8%on a reported basis). This was largely attributed to a rebound in brick-and-mortar traffic following China’s lifting of Covid-19 restrictions, heightened demand around the Lunar New Year, as well as investment in localising its operating model.

Nike released the “Year of the Rabbit” Dunk Low sneaker to celebrate the 2023 Lunar New Year. Photo: Nike

“In Beijing, Nike’s brand strength is deepening, extending our lead as the #1 cool and favorite brand,” said Nike CFO Matthew Friend on an earnings call in March. “Long term, we are confident that the fundamentals of growth for Nike in China remain strong.”

Despite these reassurances, investors have reason to be cautious. In 2022, Nike still ranked first in China’s sportswear market with market share of 22.6%. However, Anta surpassed Adidas to secure second place with market share of 20.4%. Li-Ning came in fourth with 10.4% market share, according to Statista. 

While Nike normally banks on hyperlocal products like its “Year of the Rabbit” Dunk Lows and campaigns with local athletes to be a brand that is “of China and for China,” as CEO John Donahoe once put it, it’s competing against brands that are inherently made for China. 

Nike cast Chinese basketball players Yang Liwei and Yang Shuyu in a 2022 footwear campaign. Photo: Nike

Anta rose to popularity on the back of the country’s “national wave” (guochao) movement and has improved its brand image over the years by investing in R&D, becoming an official sportswear partner of the 2022 Winter Olympics, and teaming up with major celebrities like freestyle skier Gu Ailing and Chinese actor Wang Yibo (formerly a Nike ambassador). In 2022, Anta’s revenue for the fiscal year reached 53.7 billion RMB ($7.8 billion), surpassing Nike’s China revenue of 51.4 billion RMB for the first time.

Nike is still the player to beat in China. But its performance as of late has not been enough to wow investors, or to lift its share price. As such, all eyes will be on the athletic apparel leader when it posts its earnings on June 29.