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Nike Inc (NKE) Trips Following Two Analyst Downgrades

Nike received downgrades from analysts at Morgan Stanley and Bank of America today as both firms warned about increasing competition and falling market share. The sports apparel and equipment manufacturer’s shares slipped today following the downgrades. Both firms now have the equivalent of a Neutral rating on Nike stock.

Nike

Nike’s multiple doesn’t account for sales risk: MS

Morgan Stanley analyst Jay Sole and team downgraded Nike to Equal-weight and cut their price target from $69 to $60 per share in their June 1 report. They warn that competition in U.S. athletic apparel is increasing while the category itself is weakening. They note that Nike’s core U.S. channel apparel sales have declined 1% this quarter, according to data from SportScan. They pointed out that there are many new entrants in the athletic apparel category, which are fragmenting the market. Also Nike is dealing with difficult comparisons because it has enjoyed double-digit growth for five years.

Sole and team said the shift toward online shopping has resulted in a lot of extra inventory, causing declines in LSD ASP. They also believe that supply chain problems are only compounding the challenges the company already had. Off-price channel sales are helping to offset and clear some of the extra inventory, but they warn that these dynamics could last the rest of the year.

Nike losing share to Adidas, Under Armour

The Morgan Stanley team also noted that Nike has been ceding market share to Adidas in U.S. footwear sales as Adidas’ sales have accelerated to 26% year over year growth in April and May. In the same timeframe, Nike’s U.S. footwear sales have decelerated to 4% growth. They believe Adidas has benefited from some strategic changes it made recently, thus enabling it to regain its brand momentum in the U.S. Also new Adidas products have become “hot fashion items,” and the Morgan Stanley team think these factors and recent comments from U.S. retailers suggest that the trend is sustainable.

NBA star Steph Curry’s basketball footwear, made by Under Armour, has taken a huge bite out of Nike’s shoe sales as well, stealing 800 basis points of market share from Nike year to date, although the MS team thinks this pace may slow next year.

Bank of America Merrill Lynch analyst Robert Ohmes cut his price objective for Nike from $72 to $60 per share and downgraded it to Neutral, also highlighting competition as a key challenge in his June 1 report. He believes that this is the first time the company has lost share in the North American footwear market since 2010. Further, he pointed out that after seeing two years of double-digit growth in department stores like Macy’s and Kohl’s, sales in the channel appear to be decelerating. Also his checks suggest that outlet and off-price store channels have a higher than usual level of Nike product.

Innovation also lagging at Nike

Ohmes’ concerns go beyond competition, however, as he believes that technical innovation at the company is slowing as Retro and casual styles are favored by consumers. He adds that some of the most important technical platforms like Free, Lunar, Air Max and signature basketball lines appear to be declining. Growth in North America is coming in styles like Roshe, Huarache and Retro Jordan, which he believes means the company could lose even more market share to other “non-technical” styles made by other brands.

He does expect there to be a new technical platform launched in time for the Olympics, although he expects it to take time for the platform to meaningfully impact Nike’s results.

Shares of the footwear maker’s declined 1.1% to $54.61 on Wednesday.

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