Nike Stock beats the market. The analyst highlights the risks.

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Equities have held up relatively well over the past year, with stocks hitting new highs this month. However, Deutsche Bank says there is reason to be cautious about the athletics giant, even though its direct-to-consumer business is booming.

Analyst Paul Trussell reiterated a hold note and $87 price target on Nike on Monday ahead of the company’s earnings report, which is due out next week. It lowered its sales estimates across all regions for the company’s fourth fiscal quarter to account for store closures, a factor it said will leave Nike (ticker: NKE) in the red for the period.

The bulls on the stock, he predicted, “will shrug (a la Jordan in Game 1 of the 1992 Finals) as the focus will be on the probably impressive numerical momentum, which serves both short-term and long-term thesis.”

Trussell doesn’t entirely reject this theory either. Other brands, as well as retailers that carry Nike gear, have shown there is cause for optimism about the athletic apparel and footwear industry as a whole throughout the pandemic. Investors are excited about similar names, such as


Lululemon Athletica

(LULU).

He noted that Nike’s direct-to-consumer business is accelerating and could eventually account for half of sales, up from less than a third, while digital sales are doubling to account for a quarter of the business. He said the stock will largely get a pass for the next couple of quarters regardless of the company’s results, as the bulls are more interested in how strong Nike will be in a position to start the year. reprise.

That said, he cautioned that investors shouldn’t ignore the bearish case, as Nike faces many of the same challenges as other mainstream retailers and brands. On the list are pressure on margins amid markdowns and store closures, and setbacks to its growth strategy in key markets like China.

For his part, Trussell is content to sit on the sidelines, citing increased inventory levels, which is likely to lead to discounts; tougher times ahead for some of its retail partners; and high valuation. Stocks change hands for more than 35 times forward earnings.

While Nike is down just under 5% in 2020, that’s enough to put it ahead of the


S&P500.

Over the past year, it has risen more than 17%, easily outpacing the index’s roughly 5% gain. The company’s digital strategy and the growth of its direct-to-consumer business have long been in the spotlight, and Nike’s latest earnings report in March was much better than expected.

That said, other metrics on sneaker sales haven’t been as bright and a return to growth in China is no panacea.

Nike was down 3.4% at $93.10 in morning trading.

Write to Teresa Rivas at [email protected]

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