Is it safe to invest in Nike?

Nike Inc (NKE) is one of the world’s leading makers of sports clothing and footwear. Its market cap of $153 billion is a testimony to its success, however, the once sure-footed business has stumbled during the last year, and Nike’s stock price has dipped by -20.30% as a result. So, is it safe to invest in Nike as the shares consistently fail to break through $100?

Pre-Christmas profits warning

When Nike reported Q2 earnings just before Christmas it slashed its sales outlook and embarked on a $2.0 billion cost-cutting program, citing increased macro headwinds in China and EMEA, as well as an over-complicated product range.

Nike said it planned to reduce its headcount and set aside up to $450 million in severance costs.

Despite the firm taking affirmative action the market didn’t like what it heard and the stock fell as much as -12.0 % in the aftermath of the profits warning.

The share price has yet to show any signs of a fightback, almost one month on.

Second best

Nike has historically been associated with sporting icons such as Michael Jordan and Tiger Woods, however, many of these athletes are now nearing the end of their careers.

As the FT flagged in a recent article on the brand, Nike-sponsored athletes aren’t topping the podium as much as they used to, and competitor brands are stealing the limelight.

And whilst Nike’s podium appearances are shrinking so are its margins and profitability.

Nike seems to have lost its touch, for example, the FIFA Women’s World Cup Golden Gloves winner was England’s Mary Earps.

But, Nike didn’t have her England goalkeeper’s shirt in production for the tournament, held last summer.

Outplayed by younger rivals

Nike isn’t alone in experiencing tough times.

Its German rival Adidas has seen its share price fall by more than -32.0% over the last two years as well.

Both companies have been eclipsed by younger, more nimble opposition, such as up-scale yoga pants maker Lulu Lemon (LULU) whose shares have risen by almost +50.0% in the last 24 months.

A quick comparison between Lulu Lemon and Nike highlights the issues as over the last 5 years revenue at Nike grew by +40.70% but that looks pedestrian when compared to Lulu Lemon, whose revenues have grown by just over +206.0% in that period

True Lulu Lemon doesn’t pay a dividend, and trades on a more demanding PE than Nike.

However, that dearer PE ratio reflects the company’s far higher returns on equity and assets and its growth prospects.

What is the fair value of Nike stock?

Nike isn’t in danger of going out of business any time soon, but it does need to sharpen up its act.

Plus, it wouldn’t hurt if Nike’s management had some more skin in the game too, currently, insiders own just 0.50% of the company.

Right now Nike shares trade at around $100 per share, the 52-week low is found at $88.66.

A retest at the $88 level might make an attractive entry point.

But only if there are tangible signs of an improvement in performance, otherwise, Nike should stay on the bench.