Daily Stock Market Reports

Why Nike Stock Tripped and Fell Today

What happened

Shares of sportswear icon Nike Inc. (NKE -4.21%) sold off early Tuesday and remain down 4.1% as of 1 p.m. ET after suffering a downgrade to “equal weight” from British banker Barclays this morning.

According to Barclays, Nike stock is no longer heading to $125 but will rather max out closer to $110 per share 12 months from now — and that’s the good news.

So what

After all, $110 is at least above the $102 and change that Nike stock sells for today, implying there might still be as much as 7% upside in the stock, which also pays a modest 1.1% dividend yield. So that’s 8% or so in potential profit despite the downgrade.

Problem is, the bad news seems to be outweighing the good today. And the bad news is that, also according to Barclays, there are at least five major, interrelated factors arguing against buying Nike stock right now. Specifically:

  • China’s efforts to contain the spread of coronavirus are continuing to keep that market “volatile.” More than that, Barclays actually sees risks increasing in China.
  • Meanwhile, here at home, U.S. retailers are carrying too much shoe inventory.
  • This oversupply of inventory creates a “bearish Wholesale sector demand risk.”
  • Consumer demand may continue “eroding” in the U.S. and Europe.
  • Oh…and to top everything else off, U.S.-based Nike is battling “FX [foreign exchange] headwinds” from Europe where weaker currencies over there translate into fewer dollars earned on Nike’s bottom line back here.

Now what

What happens when weak demand meets too strong supply? As StreetInsider reports, Barclays is predicting it will spark a series of promotions (i.e., discounts, i.e., sales, i.e., falling profit margins) “across U.S. Retail” this fall and winter. And as the calendar flips to spring 2023, Barclays expects this to result in slowing wholesale orders from retailers for Nike shoes, hurting both sales and earnings for the company.  

If Nike is forced to lower prices in order to move its own inventory (or to compete with rival shoemakers that are trying to move their inventory), it could spell the end to two straight years of rising gross profit margins for Nike and curtail sales growth as well. And given that most analysts already see Nike growing earnings at only about 8.5% annually over the next five years — according to data from S&P Global Market Intelligence — that could push Nike’s earnings growth down into the mid- or even low-single digits.

Given that Nike stock is currently trading well above the average price-to-earnings (P/E) ratio for S&P 500 stocks — nearly 28 times earnings — Barclays no longer considers the stock cheap enough to buy. And neither do I.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool has a disclosure policy.

Read More: Why Nike Stock Tripped and Fell Today

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