Nike's warnings on China should scare other companies that do business there

• Nike stock plunged on Friday after the athletic gear giant cut its fiscal-year sales outlook.
• Sales in China fell short of forecasts, and the company warned of headwinds there.

Nike sounded another alarm on China's economy, signaling that weak consumer demand may continue hanging over companies that do business there despite Beijing's efforts to stimulate growth.

In its fiscal second-quarter report late Thursday, the sports apparel giant beat earnings views, but its 1% revenue gain to $13.39 billion missed forecasts for $13.43 billion. Greater China sales rose 4% to $1.86 billion, below the expected $1.95 billion as growth slowed from the prior quarter.

Nike also cut its full-year sales forecast to a 1% gain from its prior view for mid-single-digits growth. And management announced plans to reduce costs by as much as $2 billion over the next three years.

"This new outlook reflects increased macro headwinds, particularly in Greater China and EMEA, adjusted digital growth plans based on recent digital traffic softness and higher marketplace promotions, lifecycle management of key product franchises and a stronger US dollar that has negatively impacted second half reported revenue versus 90 days ago," CFO Matthew Friend said on the earnings call.

Nike stock declined more than 10% Friday, and rivals Adidas and Under Armour fell 5% and 3%, respectively. Shares of Foot Locker, which relies on Nike products in their stores, also moved 4% lower.

Other companies with heavy exposure to China have also reported weakness recently. Last month, Apple said quarterly revenue in China, its third largest market, fell 2.2% to $15.1 billion, well below the $17 billion Wall Street expected.

In addition to flagging consumer demand, Apple has also had to battle Beijing's decision to ban the use of iPhones by government employees as well as the ongoing shift for domestic customers to opt for local Chinese tech brands over foreign names.

Still, the warnings from Nike and Apple suggest that China's economy is continuing to languish after Beijing removed strict zero-COVID policies late last year.

Despite the central government's stimulus efforts, key headwinds remain, particularly across the indebted property sector, which has raised concerns of a potential "Lehman" moment and slammed consumer confidence.

That in turn has led to less spending, more precautionary savings, and even signs of deflation. Meanwhile, foreign investors have been pulling out of the country in droves.

Bank of America strategists warned in September that China's stalling economy presented risks to a swath of US companies including Applied Materials, Broadcom, Wynn Resorts, and Qualcomm.

But China's pain could be America's gain, especially if weak prices there translate to less inflationary pressure here, according to market veteran Ed Yardeni.

"China's weak economy is good news for the US in particular, helping to moderate goods inflation without a recession here, aka 'immaculate disinflation," he said last month.