Needham's Tom Nikic shares his bear case for Nike
Speakers
Tom Nikic
— Analyst, Needham
Summary
Needham analyst Tom Nikic explains his bearish view on Nike and his preference for VF Corp. He downgraded Nike because the turnaround is slower than expected, with deep-rooted issues, a tough China market, promotional U.S. retail, and a wholesale-vs-DTC imbalance that could pressure inventory. He likes VF because it is farther along in its turnaround, with strong North Face and Timberland performance and an improving balance sheet.
- Tom Nikic of Needham discusses Nike and VF Corp.
- Nikic downgraded Nike due to a slower-than-expected turnaround.
- He cites tough China demand, promotional U.S. retail, and excess inventory.
- Nike wholesale rose nearly 25% while demand was weak, raising inventory risk.
- Nike needs new product innovation; retro franchises rely on scarcity.
- Nikic prefers VF Corp, saying its turnaround is further along than Nike's.
- North Face and Timberland are performing well, while Vans shows green shoots.
- VF's highly levered balance sheet is getting cleaner.
Ideas
Nike turnaround slower than expected; avoid.
Nikic downgraded Nike because the turnaround is taking longer than expected, with deeper-rooted issues than initially thought. He cites a very tough China market, a highly promotional U.S. retail environment with excess inventory, and a big disparity between wholesale growth, up almost 25%, and direct-to-consumer in North America, which could cause inventory problems in coming quarters. He also notes Nike is earning less and has lower profit margins than several years ago due to discounting and lower-quality distribution, and that fixing these issues will take time; product development cycles can be 18 months, and a recovery likely will not come by the next Summer Olympics. He would need better consumer demand and product innovation to view Nike as a value opportunity rather than a value trap.
VF turnaround ahead; brands improving.
Nikic likes VF because it is farther along in its turnaround than Nike. Two of its three biggest brands, The North Face and Timberland, are performing very well, helped by cold weather in the Northeast and Midwest this quarter, and the Vans brand is showing some green shoots after being a problem child. He also says VF's balance sheet, which had been highly levered and a major problem, is getting much cleaner.
