Shhhhhh, don't tell the sneakerheads, but their favorite stock has lost a bit of traction.
Shares of Nike (NKE) are down about 10% on the year compared to a modest 1.7% gain for the Dow Jones Industrial Average. I have had reservations about Nike for some time, mostly when stepping back from the day-to-day news cycle and thinking critically about the sneaker giant. Part of that is based on my dealings with the company through the years, but also a critical view of the business at this juncture.
Indeed, the company is an impressive outfit with so many things going right in so many product categories in so many areas of the business. Apparel and sneaker brands would kill for the consistently solid growth Nike puts up, not to mention the prime real estate the brand commands at major retailers, except Nordstrom (JWN) and other high-end brands that still don't like athleticwear for some reason. And you bet the company is going to pocket a nice chunk of change from the new innovations likely to hit the market around the Olympics.
But I think for the first time in quite a while (not as long as I have been around), Nike is about to enter somewhat of a storm. The storm is created a new competitor in Under Armour (UA), the resurgence of an old competitor in Adidas and a consumer-spending environment that may be permanently damaged from the Great Recession and chock full of parents unwilling to spend $200 plus on the latest LeBron James sneakers for their kids. The Great Storm that Nike may have to endure for a little while is likely characterized by slowing rates of growth than Wall Street has come to expect and maybe more of a capital return bent to the story than in the past (Nike has been an aggressive acquirer of its stock, and might have to step it up a notch).
Here are a couple recent events that have made me question my generally upbeat take on Nike.
Under Armour: I don't believe Nike is paying enough attention to Under Armour. It's as if Nike is Apollo Creed in "Rocky" -- a cocky champ that is underestimating a hungry up and comer in Under Armour. And hey, by now Under Armour is no up and comer! Founder Kevin Plank has turned the company into a damn beast, entering new categories and winning new sponsorship deals with the next generation of A-plus athletes and established teams. Nike losing out to Under Armour for the UCLA deal is of big significance visually speaking -- it shows a Nike that may not be as hungry as it was in the past to dominate and shut out competitors. It could have easily won that deal and solidified its college sports dominance, but it didn't -- and now the high-profile UCLA program will be rocking Under Armour.
While we are at it, how Nike reportedly handled trying to sign Stephen Curry (not much thought was put into the pitch, apparently) speaks to a potential lost hunger by Nike to get the details right and win. Curry could have easily chosen Nike if the company took the care to sign him and better understood his makeup. It didn't, and now, like the UCLA deal, lost out on a big opportunity.
Core business: If Foot Locker (FL) had come out last week and said sales of Skechers' (SKX) most-important product fell, the shares of the footwear maker likely would have went in the toilet. Yet Nike's stock barely reacted when Foot Locker sales of basketball sneakers were again weak and fell, due mostly to tepid sales of Nike's LeBron, Kevin Durant and Kobe lines. The coming Kevin Durant shoe will launch on June 20 about $30 cheaper than the prior iteration. When was the last time Nike adjusted the price down for a basketball sneaker endorsed by a top NBA star? Sure doesn't feel as if it has been done in my lifetime. One of the amazing things about Nike has been its consistent ability to raise prices to consumers with little to no sales slowdown. Considering how much it shells out to athletes each year to endorse its products, seeing a price adjustment down is kind of a big deal that could come back to surprise those analysts who remain very bullish on the company's long-term earnings growth rates.
Digital: Nike's new app will hit Apple's (AAPL) app store next month. It promises a curated feed of workouts and the ability to easily order the latest products. That's all fine and good, but the reality is that Nike continues to miss a major opportunity in wearable devices (it exited the market in April 2014). You mean to tell me Nike can't create a game-changing watch or fitness monitor? It can't partner with someone for these things? Maybe some kind of connected sweat-wicking compression shirt? I refuse to believe any of that. But, the reality is that it doesn't seem as if Nike is inclined to get back into wearables, which has left the door wide open for Under Armour to dominate the discussion.
Under Armour has gladly taken the ball with its Healthbox connected fitness platform in partnership with HTC. Are the products super high tech? No. But do they work well at improving one's life? Yes. Moreover, Under Armour has had a ton of success with the product; it was the second best-selling product on Under Armour's website in the first quarter behind the latest Curry basketball sneaker.
