Yesterday, Nike Inc. (NKE) hosted an investor day and tried to reassure Wall Street the company still had some game left. Meanwhile, Under Armour Inc. (UAA) is scheduled to report earnings on Halloween and I am afraid for anyone left in this stock.
Footwear makers Nike and Under Armour have been under pressure for the last two years. Both stocks peaked in 2015 and both companies continue to project big sales increases that never seem to materialize.
For example, at Nike's last analyst meeting in 2015, management boldly predicted revenue would reach $50 billion by 2020. At yesterday's meeting, the company backed away from that forecast and simply said it expects revenue to grow in the mid single digits. Mid single digits only gets Nike to $40 billion in sales in 2020.
Maybe management has a different definition of mid single digits than everybody else. Right now, the consensus analyst estimate is looking for revenue growth of just 4.2%. Next year, growth is supposed to pick up to 6.8%, but that estimate looks increasingly unlikely because Nike already is finishing up its second quarter of fiscal 2018. In other words, Nike needs to find another $500 million to $700 million in sales before management will need to cut guidance for next year.
Part of Nike's problem is inventory. Last quarter, international inventory jumped 13.7% on a 2.3% increase in sales. North American sales dropped 2.6%, but inventory only fell 2%. The excess inventory is squeezing margins. Nike ended fiscal 2016 with a gross margin of 46.2% and a 44.6% margin in 2017. Analysts are thinking Nike will end fiscal 2018 with a 43.5% gross margin.
Falling average selling prices also are weighing on margins. Average selling prices (ASP) worldwide were down 2%. It was worse in North America, where ASPs slid 3%. Even ASPs on Nike apparel were down 2%.
At the investor day, Nike management said it would sell more merchandise directly to consumers. Nike aims to grow its direct-to-consumer (DTC) sales from 15% of revenue to 30% over the next five years. While that sounds great, the DTC business has slowed. Last quarter DTC sales increased 11% versus 12% in the fourth quarter of fiscal 2017.
Nike said it is planning on jettisoning "mediocre" retailers over the next five year. That must mean most of them, because the rate of growth in Nike's global same-store sales keeps declining. In the first quarter of fiscal 2015, global same-store sales were up nearly 16%, but last quarter -- the first quarter of fiscal 2018 -- comps were 5%. At the same time last year -- the first quarter of fiscal 2017 -- same-store sales were up 7%.
While the stock popped 3% higher after the analyst meeting, I can't get excited by a company that has pricing problems and can't get its inventory under control. Furthermore, I think Nike will be disappointed by its DTC/e-commerce sales. Consumers hate to pay full price on the Internet and I think Nike's aggressive move toward the Internet ultimately will backfire.
As for Under Armour, it reports on Halloween, and I'm afraid for any investor who remains in this stock.
The consensus is looking for revenue of $1.489 billion and earnings of $0.19 per share.
The stock has been hurt by rumors of product delays, which has forced the company to ship via air freight certain footwear styles to meet its delivery schedules. Air freight is significantly more expensive and should wreck margins this quarter. Because Under Armour carries lower-than-average footwear margins, profits in the shoe business could be non-existent.
Furthermore, Under Armour is experiencing the same type of sales pressure in the athletic apparel business that Nike is seeing. Management already chopped 100 basis points out of their guidance on apparel margins, so anything more than 100 basis points will be a huge disappointment from investors.
While strong international sales may boost Under Armour's prospects, the company still derives 80% of its sales from North America. And for the company to make its full-year guidance, it needs a huge fourth quarter. For the third quarter, analysts are forecasting sales will increase just 1%, but next quarter sales need to jump 23% to hit its full-year revenue estimate of $5.2 billion. Good luck.
For me, Under Armour is just too dependent on one shoe launch (Stephan Curry's Curry 4) in an industry that is struggling with high inventory and weak average selling prices. The Curry 4 launches on Friday with a retail price of $130. The Curry 3 was priced at $140 and was mocked as a "golf shoe." Sneaker fans called the Curry 2 a "grandpa shoe" or a "nurse shoe." That's not exactly comforting when you are forecasting a 23% increase in revenue.
I would avoid Nike and Under Armour. These two have no game.