Nike releases its results Thursday. Don’t expect good news.

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Nike far exceeded expectations thanks to strong sales everywhere … except in China. Above, a store in Wuhan.

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has an issue with China – an issue that could arise when its results are released next Thursday. Investors should exercise caution before calling.

Yes, we have heard that before. In the last quarter, in fact. At the time, concerns about sales in China – both over Covid-19 and boycotts following Nike’s claim (ticker: NKE) that it does not use forced Uyghur labor – were supposed to limit profits. Instead, the company easily exceeded expectations with strong sales everywhere except China. That, combined with an optimistic outlook for its growth through 2025, helped Nike stock jump 16% on June 25, the following trading day.

Don’t expect a repeat. Nike stock has fallen 10% since its peak on August 5, with concerns centered on Vietnam. The country accounts for just over half of Nike’s footwear manufacturing and 30% of its clothing, notes BTIG analyst Camilo Lyon, who reduced the inventory to Neutral from Buy on September 10.

The impact on sales could also be significant. Lyon estimates Nike sales for fiscal 2022 could be in the flat to low single-digit range, down from its current low double-digit growth forecast.

“We believe that the risk of major cancellations from this holiday and at least until next spring has increased significantly for NKE, as it now faces at least two months of virtually no unit production at its Vietnamese factories,” explains Lyon. “[We] I think NKE’s stock will at best stand still until its manufacturing issues become clearer and at worst it suffers from lower sales forecasts and the multiple compression that follows. .

The United States will not be able to tell the difference. Nike’s growth is expected to slow – it is expected to earn $ 1.12 a share when it reported on September 23, up 18% from a year ago, on sales of $ 12.48 billion, in 19% increase. This is much slower than the 96% sales growth in the previous quarter. The stock, at 35.2 times the 12-month profit forecast, above its five-year average of 29.1 times, isn’t cheap enough to absorb much disappointment.

We haven’t even mentioned China yet and things there don’t seem to be improving. Nike sales in China are expected to increase 10% from a year ago, just above the 9% growth in the fourth quarter, according to data from BofA Securities.

BofA remains neutral on Nike, unchanged from its price target of $ 168, and considers risk / reward to be balanced with the stock at a price / earnings ratio of 35, writes analyst Lorraine Hutchinson. Nike stock closed at $ 156.42 on Friday, down 0.7%.

All of this points to a bigger problem. China was believed to be Nike’s fastest growing market, and its importance has been demonstrated in the correlation between Nike’s stock and the

iShares MSCI China

Exchange Traded Fund (MCHI) over the two years ended September 17, 2020, which averaged 0.6 (a correlation of 1 means two assets move in parallel, a correlation of -1 means they move in full opposition).

Over the past year, the correlation has fallen to just 0.2, signaling a much weaker link between the stock and the Chinese market. If this correlation reaffirms, pay attention.

Write to Ben Levisohn at [email protected]

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