Here’s a Quick Solution to Nike Inc (NKE) Stock Troubles

Call an ambulance. Nike Inc (NYSE:NKE) is on life support. This may be true, but we’re a long way from calling in the bankruptcy lawyers. Yes, NKE stock is going through a sales funk at the moment, but I do think there’s a quick remedy.

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Nike should buy Lululemon Athletica Inc. (NASDAQ:LULU) for $10 billion because it allows the world’s biggest sneaker company to resume its growth trajectory. It also allows NKE stock to avoid reacting to every move its competitors make and instead lead the way, which is the hallmark of Phil Knight’s legacy.

Just Do It!

In April of this year, I suggested that Lululemon and Under Armour Inc (NYSE:UA,UAA) join forces.

“Under Armour and Lululemon ought to come together to fight Nike and Adidas. Both firms currently face serious challenges as they cope with growth. Together, they would make a formidable team,” I wrote on April 17. “LULU founder Chip Wilson floated the idea back in February when he rented a Vancouver bus shelter outside the company’s headquarters that stated: ‘Lululemon, Buy Under Armour Now!’”

In that scenario, like LULU founder Chip Wilson, I saw Lululemon buying Under Armour.

However, given their market caps are close and UA CEO and co-founder Kevin Plank controls Under Armour through a dual-class share structure, it would be difficult if not impossible for that to happen without Plank’s blessings.

It’s possible that Plank could choose to make a bid for Lululemon, but there’s been no evidence to suggest this is even remotely close to happening. As for private equity, there have been rumors circulating that interested buyers are out there, but given they’d likely have to pay between $70-$80 per share, it’s a remote possibility.

Why NKE Stock?

Although NKE stock’s got a spotty record when it comes to M&A, its 2003 deal to buy Converse for $305 million has paid off in spades. Today, Converse’s annual sales are close to $2 billion, an annual growth rate just shy of 20%, and it’s still growing.

Nike needs more growth in its stable to offset some of the market-share erosion it’s experiencing at the hands of Adidas AG (ADR) (OTCMKTS:ADDYY) and Puma, among others.

I think Lululemon could be a transformational deal for the company because of the three areas Lululemon CEO Laurent Potdevin is focusing its efforts.

International Expansion

First, Lululemon’s international expansion plans dovetail nicely with Nike’s goals for Asia and other high-growth regions outside the U.S.

“Near term, Asia holds the most significant growth potential. Building on the energy of our Harajuku location, we’ve seen exceptional performance at our new store within the stunning new Ginza Six complex in Tokyo,” Potdevin said during Lululemon’s Q1 2017 conference call. “In the first few months of opening, our China stores are outperforming all store metrics currently tracking towards US$1,600 in annual sales per square foot.”

Even with all the good news in China, Lululemon still only has 61 stores outside the U.S. and Canada. There’s plenty of growth left for the leisurewear company; Nike could speed that along.

E-Commerce

Potdevin wants Lululemon generating $4 billion in annual revenue by 2020. It gets there a lot faster by harnessing the online buying habits of its Chinese customers who love to buy using their smartphones.

In Q2 2017, Lululemon’s e-commerce revenues accounted for 19.5% of its $581 million in overall revenue and 28.7% of its operating profits. Equally important, its e-commerce revenues grew 29% year-over-year, suggesting it’s got a bright future online.

Over at Nike Direct, which includes e-commerce and brick-and-mortar, it generated 29.5% of its Q1 2018 total revenue including $378 million from China alone.

Together with Lululemon, its direct business would be a force to be reckoned with.

Men’s Business

The men’s business is another silo that Potdevin’s trying to grow to $1 billion by 2020. Recently, the company launched a marketing campaign targeted to a men’s audience that should ensure this segment of its business continues to grow.

“[Lululemon] has launched a series of 30-second video spots featuring different representations of masculinity, from surfer Mark Healey to musician John Joseph to Orlando Cruz, the first openly gay boxer,” wrote PSFK’s Laura Yan September 20. “The series, called Strength To Be, emphasizes emotional strength as well as traditionally masculine characteristics.”

Currently, women generate 29% of Nike’s total revenue. Men account for just 20% of Lululemon’s overall revenue. Together, they’d bring a very compelling sales pitch to both sexes.

Bottom Line on NKE Stock

I agree with InvestorPlace’s Vince Martin that sneaker sales could be slowing, at least to the point where NKE stock earnings are affected.

Buying Lululemon would most certainly light a fire under NKE stock. Get out your checkbook, Mark Parker. It’s time to pounce.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.