Why We Downgraded Our Price For Nike

Nike (NYSE:NKE) is a company that, at the moment, seems to be wading through troubled waters. Apart from a slumped U.S. apparel market, the company has also been losing out to competition like Under Armour and Adidas in the footwear market. Furthermore, the largest sportswear manufacturer has witnessed slowing demand for its products, as indicated by the lower-than-expected ‘future orders’ metric.

Previously in 2015, the global sport apparel leader boldly announced its plans to cross $50 billion in sales by 2020. That is to say that the company hopes to increase its sales by about $20 billion in a span of five years. To put things into perspective, Nike took a prolonged 13 years to add $20 billion in revenues last time around, to jump from a $10 billion business to a $3o billion one in 2015. So from the get-go, this target seems a little ambitious, and frankly, unattainable given the current circumstances.

• Nike’s future orders have come in lower than expected in every quarter this year. The latest quarter witnessed the lowest future orders in the last five quarters. Future orders are a key metric used to gauge sales in the coming quarters; it is directly indicative of the demand for Nike products. To put this into perspective, in 2015, 87% of Nike’s wholesale footwear shipments were made through future orders, as was 67% of Nike’s U.S. wholesale apparel.

• As mentioned previously, Nike dealt with intense competition in the footwear market, primarily from Under Armour and Adidas, throughout the year.
  • In the basketball segment specifically, Under Armour has emerged as a major competitor driven by Stephen Curry’s popularity. The Curry series of basketball shoes has been selling much better in the last few quarters than Nike’s Jordan or LeBron series. This forced the company to release cheaper variants of its KD and LeBron shoes in an effort to regain some of the lost market share, even though this move dented margins.
  • Adidas has primarily scored with fashion shoes promoted by celebrities such as Kanye West. In June last year, Adidas expanded its partnership with this artist, who moved to the company from Nike in 2013 due to creative differences.

• Growth in e-commerce has since witnessed a significant dip. In the most recent quarter, the company managed to increase digital commerce sales by an insufficient 18%. For the 9 months of FY 2017 thus far, the company has managed to grow its sales in the channel by a low 35%, which is significantly below the required growth rate. What’s more, the e-commerce sales growth has been declining with each quarter in the year so far, which makes achieving the target that much more difficult.

Given the factors mentioned above, it seems as though Nike has quite a few things to figure out in the near term, while making sure it is well positioned to lead the growth in the market in the long term. For these reasons, we have downgraded our price for Nike by about 14%.

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