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3 Reasons to Sell Nike

3 Reasons to Sell Nike
Written by Publishing Team

nike (NYSE: OF) Long with a winning position. And the stock, which has increased by 217% over the past five years, easily outperformed Standard & Poor’s 500.

However, I think investors would benefit from understanding the bear situation for business at the moment. This is often an uncomfortable exercise, especially for a popular name like Nike. But it’s important to see both sides of the argument in order to become a better, more informed investor.

Let’s discuss three reasons why you should consider selling your Nike stock.

The bottom of the sneaker on the pavement.

Image source: Getty Images.

1. weakness in china

For many American consumer brands, China, with its massive population and expanding middle class, is a major driver of growth. This is certainly true for Nike. During fiscal year 2021, China accounted for 18.6% of total sales, a number that is rising steadily.

But in the last quarter, revenue in the Greater China region was down 20% compared to the same period last year. The disappointing results in the country can be attributed to the pandemic-related store closures, as well as lost production and reduced available stock. In addition, a consumer backlash against Nike — in relation to concerns expressed earlier this year by CEO John Donahoe about cotton production in the Xinjiang region — could lead to Shoppers who prefer local brands.

The important question to ask is whether the weak numbers from China are temporary. I don’t have the answer. “We expect to see sequential improvement from here, starting in the third quarter,” said CFO Matt Friend of China. Q2 2022 earnings call.

Investors should pay attention to this in the future.

2. Changing the retail landscape

One of Nike’s key competitive strengths is its burgeoning digital business, which is a vital aspect of the company’s direct-to-consumer acceleration initiative to drive innovation and agility to market. Last quarter, digital sales jumped 12% year over year and now make up 25% of total revenue. There are an impressive 79 million members of the Nike ecosystem.

But this shift has not come without a significant change in the company’s distribution strategy. In North America, the company has reduced the number of wholesale accounts by 50% over the past four years. While I think most investors would agree that being very selective is the right move, there is always the risk that Nike will go too far and alienate physical retail entirely in favor of e-commerce. It will not be easy to strike the right balance between wholesale and direct to consumer, and not sacrifice additional sales.

To Nike’s credit, the company recently announced a new partnership with Dick sporting goods (NYSE: DKS) that would associate their rewards programs with thriving retailer. This link will allow shoppers to receive exclusive offers, products and experiences. Nike is betting that not all traditional retailers are bad, and that consumers will still demand some in-person shopping.

Having plenty of storage space was good for Nike in the past, but now it can become a hindrance. How Nike continues to adapt to the changing consumer landscape, one in which an easy omnichannel shopping experience is critical to its long-term success.

3. The possibility of more epidemic disturbances

Although a tightening of its footprint and penchant for digital will help, Nike remains vulnerable to the unpredictable disruptions of the pandemic. compared to Lululemon (NASDAQ: LULU)Nike, a smaller, faster-growing competitor that pushes merchandise across its website and 552-owned store, is being negatively affected by the store closings.

Lululemon generates a much higher percentage of sales (40%) online and in North America (85%), which allows it to mitigate potential pandemic risks by taking greater control of its supply chain. On the other hand, since 61% of Nike’s business is outside the mother continent, it has been greatly affected by it supply chain disruptions, as seen in the quarterly financial results of the last couple of years.

I hope investors are now armed with the critical information needed to supplement their knowledge of the sportswear superpower that is Nike. While the business certainly has some immediate challenges to face, if history is any guide, Nike will continue to do well in the long run. Going forward, watch for weakness in China, the changing retail landscape, and the effects of the ongoing pandemic on company performance.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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