Is Nike's Business Doomed if It Doesn't Win Back China?

You'd be hard-pressed to find a globally known brand that's had stock struggles comparable to Nike (NYSE: NKE). Its stock is down more than 75% from its Nov. 5, 2021, high -- including a nearly 33% drop this year (as of market close on April 7).

Unfortunately, it hasn't been a single issue with Nike; it's a combination of a few things. Its direct-to-consumer pivot backfired, its product line has been subpar, and it's losing sales in China, one of its most important markets.

Nike is undoubtedly at a crossroads right now, but with word on just how bad Nike's China issue could be, should investors be worried about what that spells for Nike's overall business? Yes and no.

Image source: The Motley Fool.

A halt to Nike's growth engine

Over the past decade, China has been Nike's fastest-growing region, consistently providing double-digit growth. Now, its trajectory is headed in the complete opposite direction. In Nike's most recent quarter (ended Feb. 28), its North America revenue increased by 5%, its EMEA (Europe, Middle East, and Africa) revenue increased 4%, and its China revenue decreased by 11%.

Of course, China's drop isn't ideal, but unfortunately, the company expects the problem to get worse before it gets better (assuming it does get better). During its earnings call, Nike said it expects its China sales to decline by around 20% in this current quarter.

Is the current China problem a threat to Nike's business?

Even if Nike's China problems remain or get worse, the business isn't doomed in the sense of bankruptcy or irrelevance. Its footprint outside China remains large, and it's one of the most trusted companies in sports.

That said, Nike's growth story becomes very different without the consistent double-digit growth that its China segment has provided over the past decade. It would have to lean on its North America and EMEA regions for growth, but those are more mature markets that typically grow in the single-digit range.

If we assume it can't fix its China problem, the appeal becomes Nike's dividend (around 3.8% yield), since the growth engine or narrative probably won't be there.

The elephant in the room

Nike has a China problem, sure. But it also has an innovation problem that's letting smaller companies eat away at niche segments. Brands like On, Salomon, Hoka, Lululemon, and others are as popular as ever.

For a while, Nike was known as an innovative sportswear brand ahead of the curve. That hasn't been the case in recent years, as it's leaned more on retros and classics like its Air Force 1s.

If I were looking into Nike's stock, the seemingly lack of innovation would be the more pressing long-term issue than its current China woes. I trust its longevity, but I wouldn't touch the stock right now.

Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica Inc., Nike, and On Holding. The Motley Fool has a disclosure policy.