The often invincible Nike (NKE) has several issues mounting.
Shares of the sneaker king have fallen about 3.7% in the past week, lagging the broader S&P 500's 2.7% gain. When a best-in-breed name such as Nike shows this type of underperformance, it's a cause for concern. As I wrote last week, Nike's basketball sneaker sales are slowing, due to a consumer shift toward more casual offerings and inroads being made by Growth Seeker portfolio holding Under Armour's (UA) Steph Curry line.
The basketball business is the lifeblood of Nike, dominated by the Jordan brand, which seems to raise prices on each new iteration of sneaker. So to see it slow is a major concern that I think Wall Street has yet to factor into the stock.
But, believe it or not, Nike's shares aren't under pressure due to the clear slowdown in demand for pricey basketball high tops. Instead, it's a result of a confluence of events that have investors questioning the company in a way I think they haven't done in a while. Note that Nike has nobody to blame but itself for the new scrutiny by the market -- it's a notoriously secret entity, so investors have to assume the worst, given the lack of intimate knowledge on the company. Here are the problems:
The Kenya scandal is disturbing: According to a New York Times report, Nike is under some heat for what is being called a "commitment bonus" of $500,000 paid to Kenyan officials in 2011 with the goal of continuing to outfit Athletics Kenya, the national runners federation for the country. The publication said the hefty payment was immediately withdrawn and kept off the books. Nike denied any wrongdoing and said its payments were intended to help Kenyan athletes.
I saw something similar develop at the world's largest retailer Wal-Mart (WMT) a few year ago with its Mexican bribery scandal. Not exactly the same case, as Wal-Mart allegedly gave money to officials to obtain building permits, but the stench is identical. Although Wal-Mart hasn't had to pay out some huge fine, the bribery scandal did cause a few headwinds, and it's a good warning about what may develop at Nike. First, the company shelled out well over $400 million to investigate its practices in foreign markets. Second, a good number of key executives left the company. And finally, Wall Street priced in more risk into the stock, fearing the spreading of the scandal.
Suffice it to say we don't know a great deal about Nike's troubles in Kenya. But it raises the possibly of Nike having to investigate its own practices similar to Wal-Mart, which will come at a cost. Nike is huge in emerging markets, who is to say it's not doing questionable things it's unaware of, given its gargantuan size? Nike is valued as if all things inherent to its story are impressive, so the market has to bake in increased risk here. It's deserved.
Superstar marketing model quietly under attack: Last night, Nike suspended its relationship with tennis star Maria Sharapova over her admitted banned substance use. That is the second time within the past month Nike has moved incredibly quickly to cut ties with one of its high-profile brand ambassadors, the other being Manny Pacquiao, in response to horrible comments made about the gay community.
It's not that the loss of Sharapova and Pacquiao are going to cause an earnings miss at any point this year, it's the attention it brings to Nike's model of using sports stars to hawk sneakers and shoes. There is a ton of risk to the model it helped pioneer, but investors have forgotten that even exists due to Nike milking the model successfully for years. But here is another aspect to keep in mind here. Nike looks to be involved in paying out money on some bad sports star contracts at a time in which Under Armour is dominating the social discussion thanks to Steph Curry, Jordan Spieth and Tom Brady.
Tiger Woods renewed his contact with Nike in 2013 for an undisclosed term and sum. It was, likely, a boatload of money. The problem is Tiger has not been Tiger since and may not even play this year due to a back operation. With golf's greatest ambassador not competing, Nike's golf business may take a hit (traditional golf companies such as Callaway Golf and Taylormade are doing fine jobs due to stronger innovation) just as it's paying Woods gobs of money. Not exactly music to the ears of shareholders.
Kobe Bryant is retiring this year and will fade from the spotlight. Nike is paying Bryant likely a good sum of money -- the problem is Kobe is not Michael Jordan, and he may not have the same selling power as Jordan in retirement. Meantime, Lebron James, while still performing impressively on the court, has taken a backseat to Steph Curry. Nike isn't paying Lebron to take a backseat to anyone, it's paying him handsomely to own the discussion in the NBA day in and day out in order to sell clothing and basketball sneakers.
- Sidebar: what's happening right now with its stable of athletes raises the question why Nike continues to hide how much it's paying top athletes. Shouldn't this be disclosed to shareholders? Losing a key athlete provides risk to the business. Under-performing athletes also present a key risk to the business.
In the end, I believe you have to be cautious on Nike until its latest earnings report is received. Headline risk is rising at the moment, and answers are not appearing.