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Shares of Nike (NYSE:NKE) have fallen off their all time highs recently as the athletic apparel giant has found itself in the cross-hairs of escalating trade tensions between the U.S. and China. In response, Nike stock has dropped nearly 10% over the past few weeks amid escalating U.S.-China trade tensions.
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In short, Nike outsources a bunch of its footwear production, so higher tariffs mean higher input prices for Nike, which either means lower margins or higher prices for consumers, neither of which is favorable for profit growth. But this near term weakness in Nike stock is nothing to worry about.
In the big picture, Nike will be able to weather this trade war storm for the foreseeable future, and NKE should ultimately be an out-performer over the next few quarters.
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Why? Four big reasons. Those reasons are as follows.
1. Nike Can Absorb Price Increases
Tariffs are a potentially huge risk for athletic apparel companies that can’t hike prices without major customer churn. Nike is not one of those companies.
Nike’s customer isn’t price sensitive. You don’t buy Nike shoes or Nike gear because it’s cheap. You buy it because it’s the best of the best in the athletic apparel market, or because it’s the coolest thing to buy, or because your favorite athlete wears Nike. Price is a secondary component here. Thus, if Nike is forced to raise prices because of higher tariffs, the impact to sales won’t be meaningful. There may be some churn. But not much.
All in all, then, Nike has the premium brand equity to absorb tariff-inspired price hikes.
2. The Fortnite Deal
One way to offset trade-related weakness is to produce your own business-specific tailwinds. That’s exactly what Nike is doing.
Specifically, Nike just signed a big deal with Epic Games wherein Jordan brand avatars will be featured in the hugely popular Fortnite game. That’s a big deal. Fortnite has around 250 million active players, most of whom skew young.
Thus, Nike’s Jordan brand logo will consistently appear in front 250 million young eyeballs across the world. That is golden advertising, and it will almost certainly provide a nice growth tailwind for the Jordan brand.
As such, while trade-related weakness may ding margins and sales some over the next few quarters, some of that weakness will be offset by Fortnite-inspired Jordan brand strength.
3. Upcoming Signature Shoe Launch
The Fortnite catalyst is big, but it pales in comparison to what will likely be a colossal tailwind coming soon in the basketball market.