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Why Is China So Important To Nike?
China is one of the most important geographic regions for Nike, making more than 15% of total revenues and nearly 40% of the company's profits in FY 2019 (ending May).In addition to that, China has been the company's fastest growing region-accounting for more than one-third of the company's growth over 2016-2019. China has added $2.4 billion to Nike's total revenues since 2016 at an average annual rate of 18%. On the other hand, Nike's average annual growth rate was just 6.5%.Moreover, China has been the most profitable region in the last four years, adding nearly $800 million to Nike's total adjusted operating profits. In fact, China's adjusted operating margin of 30% in 2019 was more than double of Nike's total operating margin of 12.2%.Clearly, China is the most profitable and fastest growing area for Nike.
How much could China's lost revenue impact its valuation?
You can chime in with your own informed view right here.
The sections below lay out our hypothesis and one set of expectations
Trefis Stock Price Estimate
Proportion Of China Revenue Lost
What Is A Coronavirus And How It Could Impact Nike In 2020?
Recently, Coronavirus which is a kind of common virus that causes an infection in nose, sinuses, or upper throat broke out in the Wuhan city of China. Wuhan is the largest city in Central China, with a population of over 11 million people. China government has put the city in isolation. Following Wuhan's lockdown, the city of Huanggang was also placed in quarantine, and the city of Ezhou has closed its train stations. This means that 18 million people have been placed in isolation.Nike which relies heavily on China for its operations is likely to be severely impacted due to the breakout of Coronavirus.Nike's stock has slipped nearly 5% since the news regarding the virus broke out.
In this dashboard, we analyze how the breakout of Coronavirus could impact Nike's China business and in turn its valuation.
#1.Nike's Revenue Could Be Adversely Impacted By Nearly $430 Million
Total Revenue =[A+B+C+D+E]
Europe, Middle East & Africa[B]
Asia Pacific & Latin America[D]
Our original forecast expects Nike’s China revenues to grow by 20% and record $7.45 billion in total revenues.
However, the break out of the virus is likely to impact Nike’s business as people are advised to stay indoors and some areas of the country are completely closed.
As a result, we expect Nike’s China revenues would grow only 13% and touch $7 billion in total revenues. This would result in a loss of nearly $435 million in total revenues.
#2.Nike's bottom-line could take a hit of nearly $150 Million
Net Income [AxB]
Net Income Margin[A]
Lower revenues, as well as higher expenses that Nike could spend on promotional activity to clear off the stock is likely to adversely impact the company’s profits.
Considering Nike China’s operating margin of 30% and additional promotional expenses, Nike’s bottom-line could take a hit of around $152 million.
As a result, we expect Nike’s net income margin to contract by 25 basis in 2020, from our original forecast of 10.85% to 10.6%.
#3. Loss of revenues coupled with higher promotional expenses are likely to weigh on the company's earnings resulting in erosion of $0.10 per share in FY'20
No of Shares[B]
We expect the company’s net income to decline to $4.43 billion as opposed to our existing forecast of $4.58 billion. Our analysis also takes into account the fact the company will be incurring around $25 million in promotional expenses to clear out the existing inventory.
Assuming shares outstanding of around 1.59 billion, this translates to a reduction in EPS by around $0.10 per share.
#4: Nike's share could be worth $98 - lower than our base-case estimate of $102
Nike stock Price Estimate
Forward P/E Ratio[B]
In our base case (before the virus) scenario, we estimate a price estimate of $102 for Nike’s Stock.
This figure reduces to $98 after factoring in the impact of the Coronavirus.
Our complete set of analysis for Nike