The world’s leading sports goods manufacturer, Nike (NYSE:$NKE) has become the latest victim of the slowdown in Chinese growth. The company predicted a bleak outlook amid falling demand, particularly in China (AMEX:$FXI). It has been selling its unpopular stock in China at a discount and is now clear that this strategy is going to hurt the future orders from the country. Nike is expecting sales to decline by 6% instead of showing a 1.2% rise as predicted by analysts. Total orders for the brand are going to increase by 8% globally, short of analysts’ estimate of 10%. In short, the negative future growth in China will drag on revenues. Moreover, Nike isn’t sure if or when the numbers will improve.

In its recent quarterly results ending 31^st August, net income dropped 12%, the second consecutive decline, from a year ago to $567 million. This translates into earnings per share of $1.23, dropping from $1.36 last year. Total revenues increased by 9.7% to $6.7 billion while revenues from China and emerging markets increased by 8% each to $672 million and $867 million respectively. Currently, Nike’s annual earnings from China account to almost 30% of its total.

But, it is gross margins that have continued to decline, now for seven consecutive quarters and stand at 43.5% as the industry suffers from oversupply amid increasing labour and material costs. Nike is facing tough competition in the Chinese market, particularly from local brands. The declining growth in China was offset by strong numbers from North America where revenues jumped 23% to $2.71 billion but the 13% increase in orders here was slightly below analysts’ expectation of 14%.

The drop in margins shows that despite being a powerful brand, Nike is still not able to generate premium price. This is even more evident for Apple (NASDAQ:$AAPL), which according to Forbes’s recent review, is the most powerful brand in the world. But even Apple is witnessing falling average selling prices which have pulled their gross margin from 47.3% in the second quarter of its fiscal year 2012 to 42.8% in the third quarter.  Net margins dipped below 40% in the 2^nd quarter for the first time in over 3 years.

Although the results have beaten most estimates China’s numbers, which the business considers its growth engine, are indicating problems in the long run. As soon as the news hit the market, Nike’s shares dropped by 1.17% in the first three days of October.

Since the beginning of the year, Nike’s stock has seen an overall decline of 1.2% whereas its closest and probably the only direct rival Adidas Group (ADR) (PINK:ADDYY), the parent of Adidas, Reebok and TaylorMade Golf, is up by 31.2%. In the same period, the SPDR S&P 500 ETF (AMEX:$SPY) has been up 16%.

Unlike, Nike, Adidas has increased its guidance and is expecting its sales to increase by more than 10% (on a neutral currency basis) in the current fiscal year. Furthermore, Adidas has been able to maintain its already higher gross margin of 47.5% since 2011. However, Nike’s operating margin of 12% is ahead of Adidas’s 8%.  Nike has recorded greater ROA and ROE in the past 12 months. These ratios are given below:

Nike therefore continues to attract investor’s attention. The company is also likely to go forward with a $2 billion share repurchase plan, which raises 2013 and 2014 earnings forecast to between $5.35 and $6.00 per share. The growth in China will almost certainly slow down but North America remains a bright star while Nike’s long term prospects in China remain positive if muted.  It remains to be seen if the current glut is to be temporary.

However, the fact of the matter is, that despite being a powerful brand, Nike is not able to charge premium price from its Chinese customers. The company is facing intense competition in the country from local brands that are far cheaper, and Chinese nationalism is a factor in handicapping international brand growth as many of these consumer industries mature.. As the economy slows down, consumers would prefer cheaper and even lower quality products over high-end, expensive goods offered by a leading brand. Nike’s inability to predict an increase in future growth in China underscores the point that its current margin erosion is not going to be a temporary phenomenon.