Why Nike Inc (NKE) Stock Will Plummet Even More

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Nike stock - Why Nike Inc (NKE) Stock Will Plummet Even More

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What do you do with a great company that’s struggling? That’s the essential question about Nike Inc (NYSE:NKE) and Nike stock at the moment.

Why Nike Inc (NKE) Stock Will Plummet Even More

Unquestionably, Nike is a great company; it owns one of the dominant consumer brands in the world. Right now, however, that brand simply isn’t selling well, particularly in the U.S. Domestic revenue declined in the company’s rather soft first quarter, after rising just 3% in fiscal 2017 (which ended in May). Overall, sales rose just one-tenth of a percent. Even those sales are coming at lower gross margins: gross profit dollars declined 4% in Q1 and a lowered full-year outlook on the Q1 conference call contributed to the post-earnings sell-off in Nike stock.

NKE stock now trades near its lowest levels in two years, which, to some investors, looks like a buying opportunity. Support for Nike stock has held repeatedly at $51, which helps from a technical standpoint. This remains, as noted, a great American company — one, perhaps, facing short-term headwinds.

But I still think there’s more downside ahead for Nike stock — at least in the near term. The company isn’t executing all that well and its industry looks notably unhealthy. Long-term demand for sneakers looks like it might slow, but intense competition among manufacturers and retailers isn’t going anywhere.

NKE stock isn’t the worst issue in the market by any means. But there are real concerns here that suggest something more than just a short-term blip. If that’s the case, support will break eventually — and Nike stock could have big downside.

Nike Stock Needs More Growth

The question at the moment is what will get Nike out of its sales funk. The problematic answer for NKE stock is that there isn’t much.

Nike itself simply doesn’t seem to be delivering compelling offerings at the moment. And its competitive position is weaker than it’s been possibly in decades. Adidas AG (ADR) (OTCMKTS:ADDYY) has taken substantial market share in the U.S. and Europe, as InvestorPlace‘s Bret Kenwell pointed out just a couple of weeks ago. Negative headlines aside, I’m skeptical adidas’ involvement in the recent NCAA scandal will have much impact on its competitive position, or provide much benefit to Nike, as I wrote last month. Under Armour Inc (NYSE:UA,UAA) is struggling, but still has taken its footwear business from zero to roughly $1 billion in sales in just a few years.

The bigger concerns now, however, may be in areas where Nike has little or no control. Key sneaker retailers like Foot Locker, Inc. (NYSE:FL) and Finish Line Inc (NASDAQ:FINL) are dealing with declining traffic and increased discounting. Their struggles, added to the competitive situation, continue to erode the pricing power in the industry and, thus, Nike’s attractive gross margins.

From a near-term standpoint, these pressures aren’t likely to change. Consumers aren’t going to start flocking back to malls all of a sudden. Fashion trends look to be moving away from sneakers a bit; at the least, the “sneakerhead” craze seems to be fading. But neither adidas nor Under Armour is going to back off their development efforts — and a desperate Under Armour, in particular, could lead to a race to the bottom in pricing.

Near-term, NKE sales are likely going to grow slowly, if at all, and margins are guided to decline. The combination sets up an almost-certain decline in Nike earnings for FY18. And I’m skeptical things will necessarily get better for Nike after that.

NKE Stock Long-Term

One has to wonder whether the sneaker industry itself is somewhere around a peak. Sneaker consumption has risen steadily  over the past few years, but most of the increased demand has come from fashion-seekers and collectors. Sports participation, at least in the U.S., appears to be declining across the board. That, in turn, should suggest lower demand going forward for athletic shoes and apparel.

If sneakers become less fashionable, one would think that overall industry growth going forward would be somewhere around zero. And that leaves Nike in a bit of bind. It would need to take market share to grow US revenue — but it’s already losing that share. Revenue in China, in particular, and other emerging markets are going to have pick up the slack, but overseas growth likely hurts margins as well.

There’s a very real multi-year scenario here in which Nike revenue decelerates to the low single digits, and combined with margin pressures, earnings growth fades to around zero. Yet Nike stock simply isn’t priced for that eventuality. NKE stock still trades at over 22 times FY18 analyst estimates, a multiple that suggests profit will start increasing again relatively soon.

I’m skeptical those increases are coming and, if weak performance in FY18 continues, that skepticism will be shared by the market as well. If that turns out to be the case, NKE likely trades for something closer to 20x earnings at most — which suggests a drop in Nike stock back to $45, if not lower.

That’s not huge downside, admittedly, and I’m not recommending a short of Nike stock, either. But even with the stock near recent lows, investors still are pricing in a relatively quick rebound for Nike earnings. Coming out of Q1, and with Nike facing headwinds both short- and long-term, I think those investors are going to be disappointed.

As of this writing, Vince Martin has no positions in any securities mentioned.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/nike-inc-nke-stock-plummet/.

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