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Throughout 2013, many economists and media groups have begun to place more emphasis on the dire situation in China and the negative effect it may have on the U.S economy and market. Industrial and consumer demand is waning, and financial institutions in the country are struggling to solve mounting credit problems. Investors could see more proof of this slowdown when Nike (NYSE:NKE) reports on June 27th. I predict Nike will miss analyst expectations due to a softening in China that will put pressure on margins and increase inventory levels. This should serve as a warning to owners of the stock to lighten up on Nike before the company reports, to protect themselves in the event of a deepening Chinese problem.

Nike is a major manufacturer and distributor of men's and women's sports apparel and equipment in the United States and in countries abroad. Nike has been successful throughout the years in building an immensely popular brand for consumers of all ages and backgrounds. The company does this by securing popular sponsors to showcase their merchandise and through a bold and eloquent marketing strategy. Nike operates in many regions around the world, including North America, Europe, and Asia.

When Nike reported their most recent quarterly results on March 21st, management talked about a buildup of inventory in China due to a slowdown in demand. This caused concern for analysts and investors, since China makes up 12% of Nike's revenues and 25% of their EBITDA. Nike reported that in mainland China, revenues were down 10%, EBIT was down 20%, and future orders were flat year over year. Nike went on to mention in the conference call that they "expect… reported revenues for Greater China will be lower than the futures orders would indicate". They explained that the issue was an increase in inventory due to softening demand. In order to get the inventory off of Nike's books, they would need to discount items to increase sales, thereby decreasing margins.

This pressure is what caused management to focus on China and attempt to resolve the issue. According to Bloomberg, in May Nike removed the head of business in China to help get the region back on track with the rest of the company's' markets. During the conference call in March, they told analysts that China was going to take time for margins and inventories to improve, and that they were taking no shortcuts in improving the region's outlook. These moves by management and the language used in their press releases indicate that they mean to prepare the public for worse than expected numbers coming from China.

Another indicator that Nike might report a slowdown in China comes from insider transactions in the past weeks and months. Since January of 2013, insiders have been slowly selling shares, which could indicate an attempt to limit exposure to the coming quarterly report. Recently, insider selling has spiked, with over 1 million shares sold by insiders in the past two months alone. This selling by insiders could mean that while management did everything they could to try to keep inventories in check, demand weakened more than they could control, which would show in their numbers on the 27th:

MonthJanFebMarAprMayJun
Insider Selling5,9145,91475,914285,159561,980524,980

Currently, Nike trades at a multiple of around 24 times earnings. If earnings are unexpectedly soft, this multiple will inch higher, causing many to question valuation. If growth doesn't match historical averages for the company, investors may punish the stock harshly, especially in this new market environment following Bernanke's testimony on its bond buying program. I would protect myself going into the release by either lightening up on Nike shares or buying puts to hedge myself if the stock plummets more than expected.

Either way, I believe Nike has a high probability of reporting a number that might disappoint due to a weakening picture in China, and want to protect myself accordingly. This not only goes for Nike, but other companies with heavy exposure to China, like industrial or materials stocks. If Nike reports a Chinese slowdown, I would look for these names to be beaten down as well. May investors and traders be warned for the coming week.

Source: Nike Will Miss Estimates On Thursday