Nike's Growth Hinges On 'Newness,' But One Analyst Says Its Fastest-Growing Segment Is At Risk

After posting softer-than-expected revenue guidance in its fiscal second-quarter earnings, Nike Inc. NKE is banking on "newness and innovation" to drive growth. However, one analyst struck a discordant note, stating that its fastest-growing piece of business is at risk.

What Happened: ‘Just Do It' might not be working for Nike, but analysts were largely positive on the company's prospects, with most ratings being "Buy," "Outperform," or "Overweight."

However, TD Cowen analyst John Kernan is not as optimistic about Nike's strategy, casting doubt on the growth prospects of the sneaker maker.

"Nike needs improved marketing outside of basketball, streetwear and lifestyle trends," Kernan said in a research note on Friday, downgrading the stock from "Outperform" to "Market Perform."

See Also: Nike Shares Tank After Q2 Earnings: ‘Reduced Guidance Implies Ongoing Uncertainty’

Nike's $2 billion cost-cutting plan and weaker sales outlook sent the sneaker maker's shares reeling – its stock closed nearly 12% down on Friday.

"Nike faces disruption from smaller competitors in footwear and apparel. Jordan brand moving into lower price points and away from a scarcity model creates risk to the fastest-growing piece of the business," Kernan added.

Wobbly Demand, Limited Sales Growth Potential

Nike said it expects sales growth to be "slightly negative" in the fiscal third quarter, while sales in the fourth quarter could grow in the low single digits.

"We are seeing indications of more cautious consumer behavior around the world in an uneven macro environment," Nike CFO Matthew Friend said during a post-earnings call.

The company noted that although demand was strong during the back-to-school season, Black Friday, and Cyber Monday, it wobbled in between. Its online sales channel also witnessed weakness, as did the Chinese and European markets.

Nike's decision to push full-priced products and not participate in a "race to the bottom on digital" could limit the scope for sales growth, according to Raymond James analyst Rick Patel.

"We view these as the right moves to protect the health of the brand, but also acknowledge that it leaves Nike at a near-term competitive disadvantage to drive revenue," Patel said.

CFRA analyst Zachary Warring underlined that Nike's competitors could eat into some of the demand.

"Although Nike maintains a fortress balance sheet with significant capital returns, we believe the multiple will trend back down to pre-pandemic levels as the company faces competition from brands like Hoka and On [Holding] while it looks for new growth drivers and focuses on cutting costs," Warring said.

Check out other analyst stock ratings

Image: Shutterstock/ pio3