Morgan Stanley Downgrades Nike: Athletic Apparel Is Weakening, Competing Is Increasing

With the weakening in the U.S. athletic apparel category and rising competition, Morgan Stanley’s Jay Sole expects Nike Inc NKE to see a slowdown in its U.S. sales, a risk that the stock does not fully reflect at present.

Sole downgraded the rating on the company to Equal-weight, while lowering the price target from $69 to $60.

Slowing Growth

SportScan data suggests that sales growth at Nike’s U.S. core channel apparel segment slowed by one percent during the current quarter.

“Many new entrants are fragmenting the market and Nike is lapping five years of double-digit growth. Retail bankruptcies and consumers' shift to online shopping has created heavy excess inventory, which is causing LSD ASP declines,” Sole explained.

Impact Of Competition

Sole noted that strategic changes implemented by Adidas has been helping the company regain brand momentum in the U.S., with Adidas witnessing sales growth acceleration in U.S. footwear of 26 percent year on year in April-May.

On the other hand, Under Armour Inc’s UA Steph Curry basketball footwear has captures share worth 800bps from Nike, year to date.

“We continue to believe Nike will deliver strong international results and can quickly cut SG&A, if necessary. These limit downside risk. At the same time, heavy inventory levels and competitive pressures limit upside,” the analyst said.

Estimates Lowered

Sole believes that Nike’s U.S. business, which accounts for 45 percent of its total business is facing headwinds. The U.S. sales growth estimate has therefore been lowered from 7 percent to 6 percent.

The FY17 EPS estimate has been lowered by 4 percent to $2.38.