It's been 2 years since athletic apparel maker Nike Inc (NYSE: NKE ) has seen NKE stock make any meaningful moves. The firm has been in a funk, as competition in the athletic apparel space grows and Amazon.com Inc. (NASDAQ: AMZN ) takes out Nike's sales channels.
So, with NKE stock down nearly 10% over the past three months, many are wondering if now is a good time to take a position in one of the world's most recognizable brands.
Is Nike Stock Cheap?
While NKE has seen its price/earnings ratio drop from around 30 to just above 22 over the course of a year, I still think it's expensive for what it is. A P/E ratio over 20 suggests strong growth - something investors aren't getting and likely wont see for at least another year. The company is struggling, as the most recent Nike earnings report confirmed. Revenue was flat compared to 2016 figures and the firm's gross margin declined to 43.7%.
This is not a new story in the retail space - margins are getting thinner and thinner as companies heavily discount their products in order to get rid of them.
Nike is no exception.
Management said some of the margin decline was due to "a higher mix of off-price sales" and the firm also held a massive 40% off sale through discount coupon siteGroupon Inc. (NASDAQ: GRPN ) earlier this month.
Offering a wide range of its products - including some from the premium Jordan brand - at such deep discounts signals trouble for Nike and adds fuel to speculation that athletic apparel makers may follow in the footsteps of teen retailers, who have also found themselves turning to deep discounts in order to move product out the door.
Worrying Market Conditions
One of the problems with investing in retail is that it's hard to predict which trends are about to die - and that's also true for athletic apparel. Right now, many analysts are pointing to athletic gear as one of the few bright spots in retail . Some are even forecasting sales within the industry to rise 22% over the next 4 years.
To capitalize on growing demand for athletic wear, Nike has been investing heavily in its supply chain in an effort the churn out hot new styles as quickly as possible. However, I think it's prudent to point out that the rise of 'athleisure' doesn't necessarily translate into gains for NKE stock.
A survey by Piper Jaffray showed that teens are losing interest in Nike gear and turning their attention, instead, to rivals like Adidas AG (OTC: ADDYY ) and Vans . Not only is Nike competing with other athletic and footwear companies, but the firm is competing with tons of other apparel makers who have started to produce clothing that looks closer and closer to athletic wear in order to accommodate changing preferences.
And while we're talking about the athleisure trend, it's worth pointing out that tastes are likely to change over the next decade. At the moment, wearing workout gear 24/7 is in, but in a few years we may see fashion shift back toward denim, which would hurt Nike in the long-term.
The Bottom Line on NKE Stock
I don't think NKE stock is heading to zero and I'm not as bearish as those who see athletic apparel makers following in the footsteps of teen fashion retailers, but I don't think it's a good time to buy Nike. Buying any retailer is a gamble right now and Nike isn't in a great position to inspire confidence at the moment.
So far, I haven't seen any compelling evidence that Nike can pull itself together within the next year, which makes me believe that NKE is going to make its way even lower in the months to come. Some may point to the Nike stock dividend as a reason to wait out the turbulence, but the firm is offering a yield of just 1.38% - hardly enough to turn an income investor's head.
Nike does have a few things going for itself - a hefty cash supply and an internationally recognized and trusted brand. But I don't think the worst is over for Nike or athletic retailers in general, so I'd steer clear until the waters get a little big calmer.
Unless the firm's P/E makes its way into the teens, I'd say now is not the time to buy NKE stock.
As of this writing, Laura Hoy was long AMZN.
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