Analysts Say Recovery in China Is Imminent — These Brands Are Set to Benefit

Throughout the pandemic, lockdowns across China have had negative ramifications for the footwear industry, which relies on the region for production and sales.

But since China made the move to relax its zero-COVID policy and travel restrictions in recent months, global footwear companies have been cautiously optimistic about what this means for their businesses moving forward.

“Chinese consumers want our brands,” Matt Priest, president and CEO of the Footwear Distributors and Retailers of America (FDRA), told FN in an interview. “Some of the brands I’m talking to are starting to see some growth back in China, which is positive.”

This recovery comes as retailers gear up to start reporting earnings for the fourth quarter next month. Some analysts are already bullish on brands with a strong presence in China. They say they’re in a good position to capture renewed demand after multiple quarters of stagnation.

Wedbush analyst Tom Nikic in a Friday note called out Skechers, which he said will likely benefit from “brand momentum and international tailwinds” in China.

“Skechers has the highest penetration of China revenue in our coverage (16%) and is key to the Skechers stock narrative,” he said. “With China abandoning the ‘Zero COVID’ policy, we view Skechers as one of the prime potential beneficiaries.”

The weakening U.S. dollar and strength in other international markets will also be a tailwind for Skechers’ global business, other analysts noted.

And major global brands such as Adidas and Nike are also in a better position as they lap store closures and lockdowns that took a toll on sales this past year.

“Over the last couple of months, there’s been some hesitancy [in China] to go visit stores,” said Steve Lamar, president and CEO of AAFA. “But as [the outbreak] began to attenuate, as you’re moving past holiday, that began to result in more folks going out of the house.”

On Jan. 16, UBS China sportswear analyst Samuel Wang held a call with a major distributor for Li Ning, Anta, Nike and Adidas in China and noted that traffic has returned to normal after slowness in December. Pent-up demand drove strong sales throughout Chinese New Year, he said.

Like Skechers, Nike and Adidas have a considerable presence in China, accounting for a mid-teens percent of revenues, Wedbush’s Nikic noted.

In Nike’s latest earnings report in December, the athletic giant reported that sales in Greater China grew 6% on a currency-constant basis in Q2, after months of disruption in the region, which signals recovery for the Swoosh.

“After a noisy and volatile 2022, we think improving inventory trends and the China reopening will result in better fundamental performance over the last 12 months,” Wedbush’s Nikic said.

On the production front, China is also in a good position. Many brands are still working through inventory excesses from the last few quarters, which means fewer orders are being placed in factories in China right now during a time of already typically low demand after New Year’s and the holiday season.

“It’s really kind of a ghost town over in China as it relates to new orders,” Priest said.

This slowdown gives China extra breathing room to grapple with a recent surge in COVID-19 cases, which had impacted 80% of the population as of last week. By the time cases abate, factories will likely be ready to manage new orders as they come.

“As we head toward the back half of the year, that demand will pick up and there will be opportunities to place more orders and increase those orders,” Priest said.

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