Nike bull and bear debate the stock, sneaker super-cycle, and more

Evercore ISI Senior Managing Director Omar Saad and Barclays Managing Director for U.S. Retail & Apparel Adrienne Yih join Yahoo Finance Live to discuss stock performance for Nike, post-pandemic sales, inflation, and the outlook for growth.

Video Transcript

- Welcome back to "Yahoo Finance Live," everyone. Let's battle it out in our "Bull versus Bear" segment for the week, the spotlight right now on Nike-- Barclays managing director Adrienne Yih, who just downgraded the athletic apparel brand to equal weight, alongside Evercore ISI senior managing director Omar Saad, who maintains his outperform rating, join us now to make their cases.

So I'm just gonna kind of throw the jump ball here, but I do want to start with you, Adrienne, because, as I look through your notes here, you're looking really at some of the inventory risks and really looking more near-term for your thesis around Nike. Kind of break down exactly what you're looking at near-term here on the inventory side. And is that something that can be navigated through to get them into kind of a more bullish stature?

ADRIENNE YIH: Yes. So the inventory issue is sort of near to medium-term. We actually think, from a broader perspective, wholesale in general tends to follow frontline retail, frontline retail being those who sell directly to the consumer, by about six months. So we always say that, you know, frontline retailers will bear the out season to the rate at which they sold through the current season.

So we think there's gonna be a really, really tough holiday. And part of this is really about the forward 2023 purchasing behavior in the wholesale channel. Remember, Nike still has about 55% in the wholesale channel even though they're making great strides in moving to DTC. So that's sort of the crux of kind of the near to medium term.

- And, Omar, just kind of staying on that same thread of inventory, as of right now, I mean, you've sent us some interesting stats on, particularly, this sneaker supercycle here more broadly. Break that down for us and what we need to know about where Nike is sitting right now in that's that sneaker supercycle.

I haven't had any issues trying to find the drops that are the latest and greatest. And perhaps that might be part of the issue in this near term that really feeds into the bear case.

OMAR SAAD: Yeah, no, thanks for the question. Thanks for having me. Hey, Adrienne.

Look, inventory is a result of supply and demand. And as you know, we've come through a very strange supply period with everything ranging from factory shutdowns to pork backups. And so Nike, along with many of the companies we cover, especially heading into the heavier back-to-school fall holiday season in North America, bringing in inventory early to avoid the kind of supply backups that have been happening the last couple of years.

I think 65% of their North America inventory is in transit at the close of the last balance sheet. I think you back out some of those extraordinarily high in-transit numbers, and the inventory levels start to look more normalized. And, again, I think you pointed to the right equation. We are in the beginning of a sneaker supercycle.

There's this perception that sneakers have been booming for the last three years. And the reality is you can do a deep dive unit analysis, as we have in some of our recent research we sent you guys, there's been a dip in unit sales even with the rise of all the new sneaker brands.

We think there's still a lot of demand out there. People are wearing sneakers more. They're wearing through sneakers more. Their feet are absolutely used to the comfort that sneakers and other comfortable footwear brings during COVID and are hesitant to go back to uncomfortable dress shoes on a daily basis just for special occasions.

And they want to own more sneakers in their closet for different wearing occasions, not just to wear to work or to wear for workout. You know, sneakers are kind of almost becoming a highly specialized accessory. And Nike, you know, we think, is the best positioned company to take advantage of this massive sneaker supercycle. Say that fast three times.

- Exactly. You know, I want to shift gears and talk particularly around the world here, where we're looking at some of the relative strength that Nike may have in some regions versus others where, Adrienne, you've laid out that China still remains a near-term volatile landscape and a longer-term question mark here. How long do you believe it will take for Nike and some of the other footwear brands, quite frankly, to really work through that volatility?

OMAR SAAD: So the big question here for Nike and China is kind of the algorithm used to be sort of low to mid-teen growth on a CAGR basis. And they would, you know, just, every year, beat that, right? So they were more of this 20%-plus.

No one expects them to return to that, but we're really looking for them to return to positive growth. That could actually happen in the next couple of quarters. What we would say there is the landscape-- there's a big question mark as to whether this is just sort of a short to medium-term COVID transitory issue or whether this has more of a bent toward sort of the rise of domestic brands right.

So the two kind of equivalent Chinese brands would be Li-Ning and Anta. And if you look at their first-half yearly numbers, Li-Ning was up 22%. Anta was taking share of 14% in the market.

You compare that to Adidas, down 35%, and then, for the first half of the year that we know of, from Nike, down 12%. And so we think that this is a very sort of uncertain time period. The good news is that upon the reopenings that we've seen sort of in the back half of September, you have seen a resurgence in their DTC business, the direct-to-consumer business.

Adidas is taking about 400 million euro, or $400 million worth of inventory back out of that channel. So they're reversing forward sales. There's just quite a bit of inventory, a lot of promotions, in that China marketplace.

- From one of the very real marketplaces, the IRL marketplaces, if you will, in greater China, to one of the budding ones in the metaverse, which I know is part of your bulk case, Omar-- I mean, when does that actually become reality to, really, a contribution portion of what Nike's future growth may look like?

OMAR SAAD: Thanks for the question. I do agree with Adrienne that China is a near-term risk. But I think there could be a big boom in China when they reopen. And the higher-end brands tend to win in that exuberant environment as we saw in North America and Europe over the last nine months. But, you know, I also think Nike has a huge opportunity globally to sell what are effectively virtual shoes.

The blockchain technology really is a transformational technology for these types of products because it can ensure the uniqueness and the rarity of these types of virtual products, frankly, in a way that you could never do with physical products. A physical rare shoe on someone's foot could always be a fake. You can't be sure.

With blockchain technology, if I have, you know, one of the 10 rarest XYZ shoes, with blockchain technology, I can prove that with absolute certainty online. And the other thing I would say is the rare shoe collectors, which, Brad, it sounds like you might be one of those sneakerheads, a lot of those really rare shoes that they do collect, they never get worn because it ruins the value if you wear them.

So in reality, they're kind of already like virtual shoes. And so and if you can bring that kind of rarity and uniqueness and cool factor to a much, much more mass audience, and who knows what price point-- some of the most rare ones will be very expensive, and the more common ones, I think, will be less expensive.

So people-- to use them with their avatars, it could become a very scalable, high-revenue model with really high margins, obviously, because there's no physical cogs in those products.

- Omar, rare Air or not, I wear the shoes. I'm sorry. I don't know how people--

OMAR SAAD: Love that. Love that.

- --buy these shoes and just let them sit on the shelf to resell at some point. That's great. But for me and my house and myself, perhaps, I'm going to be wearing these rare Airs out here.

We've got to leave the conversation there.

OMAR SAAD: Love that.

- We'd love to have the conversation in person and have this reoccurring. Evercore ISI senior managing director Omar Saad and Barclays managing director Adrienne Yih, thank you both.