Wells Fargo analyst sees deepening troubles for Western brands in China

Investing.com -- Wells Fargo hosted a call Thursday with James Wong, CEO of a $900 million Chinese distributor and retailer of global brands, who outlined a negative outlook for Western athletic brands including Deckers Outdoor (NYSE: DECK), Nike (NYSE: NKE), and Lululemon (NASDAQ: LULU) amid weak demand, rising competition, and heavy promotional activity in China.

Wong said local Chinese competitors are offering better value with shorter lead times, while high fixed-cost expansions have become drags in a declining sales environment. Wells Fargo expects continued headwinds for Nike and Lululemon, with additional risk for Deckers in the region.

Promotions are being pulled forward, with heavy discounting starting in October ahead of the 11.11 and 12.12 shopping events, Wong said. Inventory risk remains elevated across brands that have missed sales targets. Wong sees no improvement in macroeconomic conditions, with consumer sentiment remaining depressed due to job scarcity, high unemployment, and savings drawdown. Extreme weather disrupted the third quarter and points to another short winter season.

Wong's Nike business is trending down 20% in the third quarter, compared to a 10% decline in the second quarter, with the fourth quarter expected to worsen. The China online channel closure announced in July, which represented 20% to 25% of his Nike sales, triggered clearance sales of 70% to 80% off and aggressive inventory dumping across retailers.

Wong's HOKA business, part of Deckers, is tracking up 2% to 3% in the third quarter, compared to 4% growth in the second quarter and more than 20% growth last year. Wong cited "intensified hyper-competition" as KAILAS now holds more than 50% of the trail running market with strong value positioning, while Salomon, On, Nike ACG, Brooks, Anta, and Li-Ning all push into trail and outdoor categories.

Wong said Lululemon's challenges stem from a lack of innovation and a hyper-competitive athleisure market rather than the Great Wall incident from July. The brand is increasingly promotional and outlet-bound, with growth capped by tier-one city saturation and thin tier-two city traffic.

On grew 15% in the third quarter compared to 13% in the second quarter with stable inventory. Arc'teryx maintained high double-digit growth as distribution shifts to premium doors. Adidas grew 16% in the third quarter on its China-for-China model, and Salomon's third quarter trended up 21% with successful fashion collaborations.

You May Also Be Interested In

• Pinterest builds new AI layer with Nvidia using Blackwell GPUs
• AMD (AMD) call put ratio 1 call to 1 put as share price down 6%
• L.B. Foster opens European distribution hub in Germany with Expeditors