At this point, it’s best to avoid Nike (NYSE: NKE). While the company did see some positives in recent earnings, a closer look at the company’s stalled turnaround hopes and guidance tells us plenty of challenges remain. All of which makes the stock – now a falling knife at 2016 lows – far less attractive.
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Granted, EPS of 35 cents beat estimates by seven cents. Revenue of $11.28 billion, up 0.1% year over year, beat by $50 million. On the surface, those numbers might appear encouraging, especially in a difficult retail environment.
High Valuation and Margin Pressure Limit Upside
Unfortunately, it’s the company’s high debt, low margins, and a price-to-earnings ratio of 29, which is higher than the competition, that makes the stock a pass for me. It also doesn’t help that Nike management just said fourth-quarter sales could decline 2% to 4% on an annual basis.
That’s causing a problem because if we look back at prior management comments, the company expected to see improvements later this year. The latest guidance now says investors will just have to keep waiting to see if that happens at all.
And Wall Street has apparently lost its patience. When expectations are again delayed, confidence in efforts tends to fade, which we’re now seeing. And unfortunately, analysts and investors are exhausted after quarters of hope.
China Remains a Major Headwind for Nike
This isn’t just a U.S. story. Greater China has become a deep thorn in turnaround efforts.
Nike has now experienced sales declines in China for seven straight quarters, and that shows no signs of ending. Management expects its Greater China segment to be down about 20% year over year in the fourth quarter.
That raises questions about Nike’s future turnaround. Nike’s position in China is weakening as Chinese consumers opt for domestic brands. In short, thanks to stronger competition and cooling consumer demand, China will remain a deep thorn in Nike’s turnaround efforts.
Patience is Needed for a Turnaround
Some analysts have also pointed out that the expected recovery may still be many months away, limiting the potential for near-term upside in the stock. Without a clear catalyst for growth or margin expansion, it becomes difficult to justify buying it here.
Nike says patience is needed, but Wall Street is running out of it. And while the company is making moves to right the ship, “the turnaround is progressing at a slow pace and there remains significant work to revitalize the entire product portfolio and right size its international businesses,” Telsey Advisory Group analysts led by Cristina Fernández, as quoted by Retail Dive.
Analysts at Bank of America added that, “Strong results in running and [North America] were the reasons for our patience, but with the sales inflection now nine months away, we see little room for multiple expansion, leading to our downgrade to Neutral.”
Plus, according to Needham analysts, while some of CEO Elliott Hill’s strategy could pay off, the company’s external environment is still challenging. And, “the prior CEO may have dug the company into a bigger hole than it seemed.”
Again, all reasons to avoid Nike at this point.
Investors Need to Wait Longer for a Real Recovery
In summary, while Nike remains a globally recognized brand with long-term potential, the near-term outlook is clouded by slowing growth, weakening performance in key markets like China, uncertainty of any timeline for a turnaround, and fed-up analysts and investors. Until we see some signs of CEO Elliott Hill’s turnaround efforts, it’s best to just avoid the stock for now.
Eventually, investors will have an opportunity to buy the weakness in the global brand stock. But a good deal of patience is required, which many analysts and investors have lost.
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