Why The Coronavirus Outbreak Shaved Off More Than $17 Billion From Nike’s Valuation

Nike (NYSE: NKE) was one of the first companies to issue a statement regarding the impact of the coronavirus outbreak on its business in China earlier this month. The company temporarily shuttered approximately half of its company-owned stores in Greater China, and even the stores that remain open have been operating with reduced hours. Add to this the significant drop in retail store traffic in the country in the wake of the outbreak, and there is bound to be a sizable impact on Nike’s results over the coming months.

Trefis details how the coronavirus outbreak could impact Nike’s China business in FY’20 (ending May) in its scenario-based dashboard, ‘How Could The Coronavirus Outbreak Impact Nike’s Valuation?’

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’19 (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%. In comparison, 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 Nike’s total operating margin of 12.2%.
• China is the most profitable and fastest-growing area for Nike.

We Expect The Coronavirus Outbreak To Reduce Nike’s Revenues From China By 15% Compared To Our Base Case Scenario

The impact of this on each of Nike’s key metrics will be as follows:

#1. Nike’s Revenue Could Be Adversely Impacted By Nearly $1.2 Billion

• Our original forecast expects Nike’s China revenues to grow by 20% and record $7.45 billion in total revenues.
• The 15% reduction in revenues from this base case figure indicates that Nike’s China revenues would grow only 2% to $6.3 billion.
• This would result in a loss of nearly $1.2 billion in revenues compared to our base case scenario.

We explore trends in Nike’s Revenues over the years in detail in a separate interactive dashboard.

#2. Nike’s bottom-line could take a hit of nearly $380 Million

• 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 $380 million.
• As a result, we expect Nike’s net income margin to contract by 60 basis points in 2020, from our original forecast of 10.80% to 10.2%.

#3. Loss of revenues coupled with lower margins are likely to weigh on the company’s earnings and reduce the EPS figure for FY’20 by $0.24

• We expect the company’s net income to decline to $4.2 billion as opposed to our current forecast of $4.6 billion.
• Assuming shares outstanding of around 1.56 billion, this translates to a reduction in EPS by around $0.24 per share.

#4. Nike’s stock could be worth $91 – lower than our base-case estimate of $102

• In our base case (before the virus) scenario, we estimate a price estimate of $102 for Nike’s Stock.
• This figure reduces to $91 after factoring in the impact of the coronavirus outbreak.
• The $11 reduction in price estimate per stock taken together with 1.56 billion in shares represents a reduction of ~$17.5 billion in total value.

Details about our forecast for Nike’s EPS for FY20 are available in our interactive dashboard.

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