Nike earnings: Watch for China impact, analyst says

Nike (NKE) was downgraded by Jefferies ahead of the company’s first-quarter earnings, which will be released on Thursday, September 28th. Forrester Research Research Analyst Sucharita Kodali joins Yahoo Finance Live to discuss what to watch from the company's results.

“The challenge is... that Nike has been very dependent on the Asian market, certainly on the Chinese consumer," Kodali says. “Not only do you have issues with the softening of the Chinese consumer and their spending ability, but also just a lot of… geopolitical risk."

Kodali notes that “the biggest issue for a company like Nike is if there is a glut of inventory, that may potentially have an impact on whether or not the brand is as desirable because so much of the value of the most desirable products is the scarcity, not the oversupply.”

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Video Transcript

- Nike stock heading lower today following a downgrade from buy to hold from Jefferies, citing the resumption of student loan repayments next week becoming a key pain point for consumer stocks. It comes just days ahead of the company reporting earnings on Thursday. And here to discuss further is Sucharita Kodali from Forrester Research. Thank you for joining us here today.

I'm wondering what you're expecting. A lot of people mentioning the student loan payments, but we also have the China story. Not sure if that's totally in the rearview mirror. What are you looking for?

SUCHARITA KODALI: Yeah. I think that the China story is probably the biggest one here for Nike. The challenges is that Nike has been very dependent on the Asian market, certainly on the Chinese consumer. Not only do you have issues with the softening of the Chinese consumer and their spending ability but also just a lot of just geopolitical risk that is there. Everything from manufacturing to just whether or not there is going to be enough of a detente to allow the resumption of trade as we knew it across borders.

So I think that's really the biggest issue for Nike since such a big part of its overall revenue mix is coming from international sources. The student loan repayment issue, I'm not as concerned for a company like Nike. They are a where consumers who want their product will find ways to purchase their product. So the student loan repayment issue has more of an impact on sectors like automotive, potentially even housing. I don't think it's going to have as much of an impact on branded apparel, to be completely candid.

- Yeah. And indeed, Jefferies is the firm that downgraded the stock today in part because of what they're saying could be a hit from the student loan repayment. But something you mentioned I want to pick up on, Sucharita, and you said, if people really want it, they will find a way to pay for it. And one of the things that has been amazing about Nike for those of us who followed it for a long time has been the sustainability of its brand being hit, right? People wanting the shoes. Is that still the case in sort of a more declining economic environment? Does it still have that cachet?

SUCHARITA KODALI: There are absolutely things that consumers will always want, regardless of the economic circumstances. Whether or not Nike happens to have the hottest shoes at this moment in time, I think that that is something that sneaker heads would be happy to you know to share which ones that they happen to be kind of highest on their most wanted list right now. But the truth is that it is still very much a category that consumers do want. It is still very much a category where the idea of the drop is incredibly valuable and is a big driver of demand.

The biggest issue for a company like Nike is if there is a glut of inventory, that may potentially have an impact on whether or not the brand is as desirable because so much of the value of the most desirable products is the scarcity, not the oversupply. We've learned that over and over again from luxury brands, from Coach to Gucci, that when they are overdistributed, it is a big problem for the health of the brand. And Nike needs to figure out, if they do have an inventory glut, what they're going to do with that excess inventory in a way that still preserves the desirability of their highest ticket items, which are the Jordans and the Air Force 1s.