Nike’s (NKE, Financial) shares are now trading very close to its 52-week low of $49.01. Considering the direction in which Nike’s sales and future orders have gone in North America, it is clear the stock may continue the downward trend that started in November last year. Nike has lost more than 22% of its valuation since then, but recovery seems to elude the world’s largest sports footwear maker as competitors keep nipping at its heels.
Nike has now missed future orders estimates more than three times in a row. Future orders is a key metric that shows the demand for a product in the market. It counts the number of orders the company received from buyers in advance of actual consignments being shipped out.
To make matters worse, Nike has now stopped issuing future orders numbers, leading investors to believe that something is going on behind the scenes.
“The move to stop issuing future orders seems 'very suspect' at a time when North America and other markets have slowed down.” - Reuters
Make no mistake, Nike is still on the growth path. Revenues have grown from $23.33 billion in 2012 to $32.38 billion. In the first quarter of fiscal 2017, Nike posted 8% sales growth and 10% growth on a currency-neutral basis. But the biggest threat to Nike’s growth perception is the growth of of its competitors. Under Armour (UA, Financial) has been getting bigger and bigger every year and Adidas (XTER:ADS, Financial) has done extremely well in 2016, increasing competition and eating away at Nike's market share.
"Adidas brand continued its robust momentum with revenues up 20 percent on a currency-neutral basis, fueled by double-digit sales increases in the Sport Performance, Adidas Originals and Adidas Neo lines. The brand marked double-digit growth in every geography, with the exception of the Russia/CIS zone, where revenues grew at a mid-single-digit rate, the company said." - Footwear News
In the first nine months of the current fiscal year, Adidas posted 15% growth in revenues, from 12.748 million euros ($13.6 million) last year to 14.604 billion euros this year, while Nike’s revenues grew 8%, 6% and 8% in the last three quarters. On a comparative basis, Adidas was way ahead of Nike, which has exerted a lot of pressure on Nike’s stock.
Though the slowdown in future order numbers is indeed cause for concern, Nike is visibly still on the growth track. Considering the size and scale of the company, it will be difficult for its competitors to dislodge it from the top spot. But competition has indeed intensified. A growth rate of less than 10% is definitely not going to make investors happy when the company has openly set an ambitious goal of reaching $50 billion in sales by 2020, which requires the company to hit double-digit growth rates quarter after quarter.
Although most of the apparent sluggishness in sales growth can be attributed to negative currency impact, Nike must fight against the tide and address the near-term Adidas threat, as well as the impending threat from Under Armour. Things have become a bit tight due to the performance of the competition, but investors must realize that Nike did not get to the top of the footwear market and stay there without facing competition. If the stock breaks its 52-week low, it will be a great time to add this company to your portfolio because it will stay at the top of the footwear market for many years to come.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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