The Ratings Game: Goldman Sachs says supply chain challenges and inflation are actually among the reasons to buy Nike’s stock

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Nike Inc. is facing supply chain hurdles, cotton inflation, and other challenges, but Goldman Sachs analysts say now is the time to buy the stock.

Goldman initiated Nike
NKE,
+1.89%

at buy with a 12-month price target of $172 in a note published Tuesday.

“Currently, Nike is facing more macro headwinds… than it has in some time,” wrote analysts led by Kate McShane. But they believe Nike is well positioned to navigate the headwinds and emerge in an relatively stronger position.

Some past instances of Nike underperforming the S&P 500 index
SPX,
-0.14%

include a period in 2015 and 2016 when sales of Adidas AG’s
ADS,
-0.44%

Stan Smith shoes soared and Nike struggled to compete, and Sports Authority went bankrupt, leaving a ton of merchandise on the market. The stock was back at a record in January 2018.

See: Levi Strauss diversified its supply chain a long time ago and says it’s now reaping the rewards

Now, Nike is facing problems tied to COVID-19, with manufacturing in Vietnam stalled by facility shutdowns, and the soaring price of cotton, which Goldman analysts say was up 45% year-over-year in August. Apparel is big business for Nike, and high cotton prices could hurt gross margins.

Moreover, Goldman says there has been backlash against American brands in China, with analysts seeing a drop-off in downloads of the SNKRS app, though sentiment could be slowly improving.

Nike stock has lost about 12.6% from its Aug. 5 record close of $173.85, but was still up 8.1% so far this year. Meanwhile, the S&P 500 index
SPX,
-0.14%

has gained 16.1% year to date and the Dow Jones Industrial Average
DJIA,
-0.18%

has climbed 12.6%.

“[W]e think there could still be upside to the stock as Nike will likely benefit from more customers focusing on wellness, a likely increased casualization of fashion trends post the pandemic, continued execution of the company’s differentiated retail strategy which should drive stronger sales and margins, the leveraging of its rich customer data and suite of apps to drive membership and demand globally, and as supply/demand remains extremely tight; limiting promotions,” Goldman wrote.

Also: Walmart, Target, Home Depot and other large retailers are chartering ships to bypass supply chain problems. Will the strategy save Christmas?

Analysts highlight the 300 million SNKRS app members, the company’s millions of fans on social media and the length of time that a Nike shoe stays in style, in part because of the technology that goes into the merchandise.

A pair of women’s Dunks, released in September. Via Nike

“The Dunks were originally released in 1985, making them a somewhat vintage style of shoe,” the note said.

“Despite this, we have seen the Dunks popularity skyrocket in recent years, suggesting a kind of timeless, nostalgic interest in certain Nike platforms, driving engagement from sneaker fans decades after the shoes originally came out.”

Goldman also expects growth from the Jordan brand, in the women’s business and its direct-to-consumer initiatives.

“By consistently bringing new and creative sneaker technology to the market, Nike has produced differentiated products that set them apart from competing brands, which we believe helps drive customer loyalty and supports pricing power,” analysts said.

Nike is scheduled to report fiscal second-quarter earnings on Dec. 23, according to FactSet.