UBS cuts its price target on Nike due to the coronavirus
UBS cut its price target on Nike to $123 down from $136 (NKE) due to the coronavirus. However, it is still maintaining its Buy rating on the company, due to its strong fundamentals.
“Nike indicated on 2/4 the coronavirus would negatively impact Greater China sales. We assume sales pressure will persist through Nike’s 4Q (ending in May) and, therefore, lower our 3Q20 and 4Q20 EPS estimates. Our new FY20 EPS forecast is $2.73, down 12%. We anticipate a 2H21 rebound, so our FY21 EPS estimate only drops 10%,” UBS indicated in a recent note led by analyst Jay Sole.
“We apply the same 37x P/E on our FY21 EPS estimate to value NKE since we continue to forecast high-teens EPS growth once Nike recovers from this episode. Therefore our Price Target falls to $123 from $136,” the note went on.
On February 4, new Nike CEO John Donahoe said in a statement that the company would see a material impact from the global crisis.
“In the short term, we expect the situation to have a material impact on our operations in Greater China,” Donahoe said. “However, Nike’s brand and business momentum with the Chinese consumer remains strong, as reflected in the continued strength of our Nike digital commerce business.”
To say that China is a big part of Nike’s global strategy is an understatement. Former CEO Mark Parker said in 2019 that “Nike is a brand of China, for China.” Nike currently sources 25% of its apparel from China, and around 18% of Nike’s quarterly revenue comes from China. In Q2, Nike’s business in Greater China grew by 23%.
Despite the disruption in its supply chain due to the COVID-19 outbreak, UBS says improvements in Nike’s supply chain will help Nike weather the virus, citing supply-chain expert Justin Miller, executive VP of logistics and operations at Modell’s Sporting Goods.
“Mr. Miller explained how and why Nike’s supply chain had improved so much ... Nike’s ‘fill rates,’ — essentially the percentage of delivery matching a retailer’s expectations — have jumped into the high 90% range from 85%. Nike’s can now increase the supply of hot selling product in 4-5 months versus 9 before. Nike’s inventory visibility has improved significantly, resulting in fewer markdowns globally. Most importantly, Mr. Miller sees much room for further improvement,” said Sole.
Reggie Wade is a writer for Yahoo Finance. Follow him on Twitter at @ReggieWade.
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