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already had a China problem. Now you can add Europe to the list. The only question ahead of Monday’s earnings report is whether all this is already reflected in the stock. Here’s betting it isn’t.

Nike (ticker: NKE) is expected to report a fiscal third-quarter profit of 71 cents a share after Monday’s close, down from 90 cents the previous year, on sales of $10.6 billion, up from $10.4 billion. The real problems could start with the fourth quarter, with some analysts—even the bullish ones—worrying that revenue estimates look high and expecting tepid 2023 guidance. They’ve been cutting their estimates and lowering their price targets, from $184.93 at the end of January to a current average of $168.55.

There’s a good reason for that. This past September, the Trader column warned that Covid and nationalism could create headwinds for Nike in China, but we didn’t suspect the nation’s turn to “common prosperity” would have such a negative impact on both domestic stocks and those that look to China for growth. Still, it’s Covid that will likely have the biggest impact.

“For China, the recent surge in Covid cases has further reduced visibility to planned sequential sales improvement,” writes Baird analyst Jonathan Komp, who rates Nike Outperform and still sees strong growth outside China.

Europe could also be a problem in coming quarters, according to Wells Fargo analyst Kate Fitzsimons. Like Komp, Fitzsimons has an Overweight rating on Nike stock, but lowered her 2023 revenue and earnings-per-share estimates “largely on Europe.” Rising natural-gas prices are likely to result in a more subdued consumer in Europe, where Nike gets about a quarter of its sales.

That’s not to say there aren’t good things happening for Nike.

Puma

(PUM.Germany), and

Адидас

(ADS.Germany) have both pointed to strong demand outside China, while Nike’s direct-to-consumer channel now makes up about half of its North American sales, says Komp. What’s more, many of Nike’s problems might already be reflected in its stock, which has dropped 26% to $132.35 since closing at an all-time high of $177.51 on Nov. 5. It now trades at 29.3 times 12-month forward earnings, according to FactSet, still higher than the

S&P 500"S
19.2 but lower than the 40.9 it sported at the end of November.

BTIG analyst Camilo Lyon calls Nike’s current price “attractive,” but he isn’t ready to change his Hold rating yet. He notes his forecast for a 15% sales decline in China “could prove too optimistic,” and Nike still has supply-chain issues. He’s also concerned about rising input costs eating into margins. “Taken together, despite NKE’s slow progress, we still see headwinds to overcome,” he writes.

We can’t help but agree.

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