Nike is hurting in China, but Lululemon isn't: Analyst explains

Retailers like Nike (NKE), Lululemon (LULU), and Starbucks (SBUX) are under pressure as slowing growth in China weighs on profit margins. TD Cowen managing director of retail and consumer brands John Kernan joins Catalysts to discuss how consumer weakness in China is impacting retailers.

Kernan notes that, based on his company's latest survey, Nike has "carved out a leading position in terms of brand preference in athletic footwear. However, he thinks "investors and analysts need to rein in their expectations for China, both on a top-line and margin basis long term. It's a lot of policy headwinds that could happen from here that are unpredictable and unknown," Kernan explains.

He warns of potential retaliation from China in response to US tariffs, regardless of who takes the White House in 2025. However, he believes that a Trump presidency would bring "increased rhetoric to the table."

On the other hand, Lululemon is one of the fastest growing brands in China, Kernan noting the company's increased focus on the country. However, he believes there may be some headwinds fore retailers with "the rise of the domestic brands in China and their ability to steal market share."

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Melanie Riehl

Video Transcript

Retailers like Nike, Lulu, Lemon and Starbucks under pressure as slowing growth in China has weighed on those companies profit margins.

Now as we head into the thick of earning season, which names are best positioned to overcome some of that weakness.

Joining us now to discuss, we got John K and T DC and managing director of retail and consumer brands.

Thanks so much for joining us here, John, I want to start specifically on Nike having a really tough go of it with the consumer weakness that we've seen in China in particular.

If you believe that the China story is not changing, how do you believe that there's going to be a recovery in Nike?

Well, we're very cautious on Nike.

We have a whole rating in $75 price target.

So there could easily be more downside in the stock from here.

I think if you look at their China business, they've carved out a a leading position in terms of brand preference and athletic footwear and apparel in China.

The macro in China is a real issue.

Our survey which was a survey of 2000 consumers on the ground in China pointed to real concerns about some of uh housing prices that are concerned.

Uh The demographics in China are some of the worst uh in the developed world.

And Nike has a tough go.

But in China from the competition, local based China competition, local based China competition is increasingly scaling.

They've added $5 billion in revenue since 2019, between two companies leaning and a NSA Nike's revenue is down over a billion dollars during that time period.

So uh Nike's in a tough spot from a macro perspective right now.

So how big of a drag do you expect that to continue to be on the stock?

I think investors and analysts need to rein in their expectations for China both on a top line and margin basis.

Long term.

It's a lot of policy headwinds that could happen from here that are unpredictable and unknown.

But if, if some, if our Washington research group um is right on some of the, some of their concerns about uh preferred.

Uh some of the trade policy, you could see a real retaliation from Beijing that could really hurt from a tariff perspective.

It could hurt from a demand perspective.

That's what, that's what we're most concerned on.

Say more about that retaliation.

And do you think that that retaliation requires a Trump presidency or do you think that it is going to occur regardless of who ends up in the White House come November seems like a bipartisan issue at this point.

Although Trump may bring uh increased rhetoric to the table, but permanent normal trade relations could be removed with China.

They would certainly invoke some type of retaliation from Beijing.

There's a lot of capital controls that our Washington research group uh has written and talked about quite a bit and retaliation from Beijing and Chinese consumers could be significant.

Again.

It's an unknown but it certainly seems like it has higher probability of of policy headwinds increasing as we get into 2025.

John, is that a similar argument just in terms of the downside risk that you're making here for Nike?

Could you make that for Lululemon and why or why not?

But we are vibrated on Lululemon.

I think the stocks valuation is extremely cheap here.

But I think one of the real concerns across our report today was how investors would value China based cash flows.

What's the appropriate discount rate?

What's the long term growth rate of companies, businesses in China?

There's just so much uncertainty on this right now, Lululemon uh has an increasing percentage of growth coming from China.

They're hosting Investor Day in China in October.

So they are strategically very focused on China.

And I think it's a concern from a lot of investors given all the issues we just spoke about.

What do you think the potential is for Lululemon to be able to emerge as the retailer that found a way to win in China, when you've got Nike Adidas Estee Lauder struggling because of pressures in the mainland.

Yeah.

Sure, Lululemon's business right now, it is incredibly strong in China that we expect the China based business to be up uh nearly 40% year over year this year.

On top of very strong growth last year, we think they'll finish around $1.5 billion in revenue by the end of 2024.

And they could have a reasonable path to $3 billion plus.

So there's going to be tremendous growth in China.

Now it's gonna, you know, there's gonna be a lot of growth is really dependent on how it affects uh how investors view that growth and what what multiple they're willing to pay for that growth.

John, when it comes to brands trying to figure out how to succeed in China, I I guess what are the biggest differences just in terms of brands that are resonating with Chinese consumers?

What are they doing?

Right.

What are some of the key differences that that you're noticing when it comes to success in in the Chinese market versus what retailers are doing?

Who are, who are succeeding here in the US?

I'm sure the Chinese consumer obviously has different preferences uh and styles in us consumers.

Certainly Nike has carved out a very large and successful business in China, so has Adidas in our sector.

Uh Lululemon is the most rapidly growing brand in China among that, that pure set right now.

Uh but some of the concerns lies in how fast some of the local China brands are scaling, particularly leading Anta Vila, which is owned by A a there's other brands rising.

So kind of be a little concerned about the rise of the domestic brands in China and their ability to steel market share.

All right, John, we're gonna have to leave it there.

Thank you so much for joining us this morning.

That was John Kern and TD Cowens, managing director of retail and consumer brands.