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Nike, Inc. (NKE) Faces Contentious Cotton Relations
Nike started trending down last week after relations in China reached a head amidst brewing controversy. The company, essentially, has been left with an ultimatum as the result of tensions between China and the Western world: Either embrace Xinjiang cotton and come under attack from Western markets – or reject Xinjiang cotton and lose purchase in the world’s second-largest economy. This quandary has led to share losses as spooked investors back out of their positions.
So, what’s the deal?
China has made news cycles for years due to reports of human rights violations and genocide against the roughly 12 million (predominantly Muslim) Uyghurs living in the northwestern region of Xinjiang. The outrage increased after the U.S.-based Center for Global Policy reported last year that Chinese government and media documents revealed hundreds of thousands of Uyghurs are being forced to pick cotton and other crops by hand as part of their state-mandated labor in “reeducation camps.” In response, the Trump administration in January halted all cotton and tomato paste imports from the region.
China has (before and since) rejected claims of genocide and forced labor, with Beijing citing reducing poverty and countering extremism as their main goals in the region. On Thursday, Foreign Ministry spokeswoman Hua Chunying called the reports of forced labor “malicious lies fabricated by anti-China forces.” Many European-based brands have been faced with opposition in recent weeks as tensions have heightened over the issue, while Chinese firms have united against the Western world and embraced Xinjiang cotton unabashedly.
Which leads us back to Nike and their cotton-sourcing problems.
While Nike notes that its products aren’t currently sourced from Xinjiang – and has stated recently that its code of conduct prohibits forced labor – making nice with China is increasingly important to their bottom line. Greater China Nike last year reported a 51% boom in sales in 2020 to $2.3 billion, while North America, Nike’s largest market, lost traction by comparison. This juxtaposition has left some investors in an uncomfortable position: Take Nike at their word – or sell their position altogether.
The Sole of Satan
In more recent – and low-stakes – drama, Nike on Monday sued New York-based MSCHF Product Studio, Inc, for their collaboration with “Old Town Road” rapper Lil Nas X on the… erm… bloody sales of MSCHF’s “Satan Shoes.” (Lil Nas X is not named as a defendant.)
In a New York federal court, Nike lawyers stated that the production and sales of the customized, red-and-black, devil-themed Nike Air Max 97 sneakers infringe upon and dilute Nike’s trademark. 665 pairs of the shoes – which reportedly contain “one drop of human blood” in the sole – reportedly sold out in less than a minute when they were released on Monday at $1,018 per pair. The 666th pair, which was to be raffled off by Lil Nas X himself, has yet to find a home amidst ongoing litigation.
Nike further claimed that the shoes were produced “without Nike’s approval and authorization” and that they are “in no way connected with this project.” The bulk of the complaint, however, is not related to Nike’s lack of willing participation, but the backlash the company has faced since the shoes’ release: “There is already evidence of significant confusion and dilution occurring in the marketplace, including calls to boycott Nike in response to the launch of MSCHF’s Satan Shoes based on the mistaken belief that Nike has authorized or approved this product.”
While Nike’s shares admittedly haven’t been affected by their unwitting participation in MSCHF’s devilish antics – yet – protecting their brand (and investor relations) appears to be the primary impetus behind their litigious actions.
Nike, Inc. By the Numbers
Tense international relations and Satanic footwear aside, Nike experienced a decent year on the balance sheet.
To start, their revenue topped $37.4 billion, a 5.8% increase from their $36.4 billion revenue three years ago. At the same time, their operating income slipped from $4.4 billion to $3.1 billion – though YOY growth exceeded 34%.
Per-share earnings also saw significant growth of 33.7% to $1.60 for the year, and 82.8% growth over the trailing three. In the same period, ROE experienced rapid growth from 17.4% to 29.7%.
These numbers show a robust, well-rooted company making the best of a perilous, unprecedented year – but what does our AI have to say on the matter?
According to Q.ai’s AI, Nike, Inc. B’s in Technicals and Growth and C’s in Quality Value and Low Volatility Momentum. The company is projected to have forward 12-month revenue of growth of almost 10%, and it’s currently trading with a forward 12-month P/E of 36.34. All signs point to a strong future for America’s favorite footwear brand – which is why our AI has rated Nike Attractive for the month of April.
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