When will Nike backers throw in the towel?
You have to hand it to Nike Inc. investors. After all, Adidas AG’s successful push into the athleisure footwear market has not only captured the attention of consumers, but perhaps more so when it comes to the investing community.
Adidas shares are up a whopping 140 per cent in the past two years, as it has successfully put a dent into Nike’s dominant market share in branded footwear. The Swoosh, meanwhile, has held up quite well, with the stock relatively flat over the same period.
Yet Nike shares have undoubtedly lost some momentum, as structural changes in the retail sportswear industry put more pressure on the business models of firms like Foot Locker Inc. That’s partly been driven by Nike, Adidas and others targeting direct-to-consumer sales, but Nike has it’s own problems to contend with. Its sales growth has fallen from 10 per cent in 2015 to an estimated 4.4 per cent this year.
“In that time, the company has shown little in the way of progress as it relates to its stale innovation pipeline, while a resurging Adidas has taken meaningful share to the point of causing panic internally,” said Camilo Lyon, a footwear and apparel analyst at Canaccord Genuity in New York.
Not only have retailers with high levels of exposure to Nike products, such as Foot Locker, encountered negative same-store sales trends, but Nike itself has become more promotional as a growing number of its footwear platforms slow. Areas of particular concern these days include Jordan, Roshe and signature basketball.
“As we feared, consumers’ appetite for Jordan is deteriorating sharply,” Lyon said, noting that an online check of FootLocker.com showed that roughly 70 per cent of men’s Jordan shoes were on sale.
Nike has faced criticism for its strategy of “riding its strongest horse into the ground,” as the volume of Jordan product has increased for recent launches. But it may be starting to pull back in response to the slowdown prompted by trends shifting to lifestyleoriented footwear.
Jordan has managed to grow at nine to 10 per cent over the past two years, so the problem with an adjustment such as that, is that it could put a big dent in growth.
Nike reports first-quarter results on Tuesday, Sept. 26, followed by an analyst day in late October. While Q1 is the company’s strongest period in terms of beating analysts’ expectations, Lyon is recommending that investors be cautious.
The low bar Nike has set should pave the way for an upside surprise, but he reminds investors that Nike’s Q4 balance sheet had red flags. That included advertising as a percentage of spending spiking to 13.5 per cent, while sales grew only five per cent.
The analyst believes that leaves little room for Nike to produce a quality Q1 sales beat. “More likely is an expense-driven beat on easy comparisons,” he said, adding the expectations for the second half of the year are “far too optimistic.”
If things don’t change for the better soon, investor patience in Nike may start to wear even thinner.