2 Hurdles Nike Needs To Clear

Nike Inc NKE may have slowed down, but it could catch a second wind yet, according to Barclays analyst Matthew McClintock. The analyst reiterated an Overweight rating and $65 price target.

McClintock sees two clear sides to the recent controversy over Nike’s performance: long-only investors with their eyes on future features and hedge funds focused on short-term pressures.

In the long term, Nike expected to accelerate innovation and “revolutionize” its manufacturing process. However these positives have been shadowed by a highly promotional environment, wholesale partner disruption, and DTC deceleration.

Hurdles To Clear

McClintock sees two challenges Nike must deal with if it is to succeed in the long term.

First, the company’s distribution model has not kept up with changing consumer behaviors. In particular, Nike has has trouble with its department store channel.

Second, several of this year’s products haven't piqued consumer interest to the degree it has in past years. Much of this stems from increased quality and athlete-branded products from competitors — most notably Under Armour Inc UAA and adidas AG (ADR) ADDYY.

“Neither initiative should deliver a major inflection point in underlying results this quarter,” said McClintock. He notes that the company has already begun working to address these issues by creating direct relationships with consumers and speed up innovation and the supply chain.

Visualizing Nike’s Next Race

The analyst doubts Nike will guide down fiscal 2018 estimates after reporting fourth quarter 2017 results.

“As we head into 4Q17 results, we acknowledge all the negative data points floating around the investment community yet we wonder if any of these data points actually matter to the long-term terminal value of the company,” said McClintock.

In McClintock’s view, recent pressures will turn out to be positive drivers of long-term value, which will more than offset current shortfalls.

Eyeing 2019, the company looks to be setting itself up to meet or even exceed past periods of “exceptional performance.”

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