We knew that adidas AG (OTCMKTS:ADDYY) had been gaining ground on companies like Nike Inc (NYSE:NKE) and Under Armour Inc (NYSE:UA, NYSE:UAA). Nike is still the leader, but its grip is certainly slipping. Jefferies analyst Randal Konik cut his price target on NKE stock all the way down to $49 from $60. The cut represents about 8% downside from current levels, although Konik is maintaining his hold rating.
In any regard, it’s not his price target I found interesting. It was his webscrape analysis, which shows a stark year-over-year (YOY) change. Last year, Nike had 52 shoes in the top 60, a stunning 86.6% grip on the market. Now it has just 35 in the top 60, or just 58.3%. The upswing for Adidas is even more impressive. After having just two shoes in the top 60 last year (3.3%), it now 24 (40%).
Konik reasonably points out that this will have bad implications for Foot Locker, Inc. (NYSE:FL) and Finish Line Inc (NASDAQ:FINL), given how large of a customer Nike is.
NPD Group’s data for August also wasn’t good for Nike. It shows Adidas has overtaken Nike’s Jordan line as the No. 2 seller in U.S. sports footwear sales. Nike still holds the top spot, but it’s an eroding position. In August, Jordan basketball shoe sales fell roughly one-third YOY and Nike fell mid-single digits. Adidas saw basketball shoe sales soar 40%.
“This is an achievement I never thought I would see in my lifetime,” said NPD’s Mike Powell.
What Does This Mean for Nike?
Obviously the resurgence of Adidas has had differing impacts. Under Armour stock is just pennies from its 52-week low and is down more than 50% over the past 12 months. FL and FINL have been hammered as well, down 50% and 57%, respectively. That makes NKE stock’s 3.5% fall seem pretty good, honestly.
But it sitting atop the shoe market all while losing share is a recipe for lower sales growth, lower margins and lower profitability. That in turn equals a lower valuation in the stock market, something that’s on the minds of all NKE stock investors.
The question really becomes, how long will Adidas’s resurgence continue and how much more share can it garner? Is Nike near the end in terms of surrendering market share or will Adidas continue to claw it away for years to come? It may be hard to imagine Nike giving up much more ground. However, it was also hard to imagine Adidas going from two shoes in the top 60 to 24 inside of a year.
In an investor meeting in October 2015, Nike execs said they expect 2020 revenue to exceed $50 billion. Is that expectation too high? NKE is forecast to grow sales just 4.8% in fiscal 2018, its lowest level since 2011. Estimates call for sales to hit about $36 billion this year. $50 billion by fiscal year-end 2020 appears off the table.
Whether management comes out and says it, the market likely knows this already.
Trading Nike Stock vs. Investing
The impact on Nike has different implications depending on investors’ timeframe. For all of NKE stock’s issues, its valuation might be hard rag on. Its price-to-earnings (P/E) ratio of about 21 is down notably from the 32 times earnings it traded at in the beginning of 2016. It now trades in-line with the S&P 500 and below its five-year average P/E ratio of 26. Its dividend is something to cheer about too.
While the throne may be under siege, Nike is still the king of athletic shoes and apparel. Its powerful brand and ability to stay atop the market is worth a premium in most eyes. That’s why I’m wondering how much downside could be left.
There’s been a lot of analyst coverage this month, too. Deutsche Bank and Bernstein hit Nike with buy ratings and price targets of $61 and $69, respectively. Four analysts hit NKE stock with a hold/neutral rating, with price targets ranging between $49 and $54. One (Bank of America/Merrill Lynch) slapped a sell rating and $42 price target on the stock. Barron’s made the case for a 10% drop, down to about $47 or $48.
Taking out the best case ($69) and worst case ($42), we have an average price target of about $52.60. For a trader, a few-dollar swing is a big deal. For an investor though, those declines are blips on the chart over the long term. Could NKE stock fall to $50? Sure.
If I am an investor for the next 5, 10 or 20 years, am I worried about a 5% to 10% correction at this point? Not really. The next $5 could be up or down, so investors will have to decide if buying now fits their risk/reward profile. It also depends on their outlook for the shoe market. On the chart, there is a breakdown of several important levels for NKE stock.
Nike will report earnings on Tuesday September 26th, which should obviously make some waves.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a long position in NKE.