Actions of sportswear icon Nike Inc. (NKE -4.47%) sold early Tuesday and remains down 4.1% at 1 p.m. ET after suffering an “equal weight” downgrade from the British banker Barclays this morning.
According to Barclays, Nike stock is no longer heading towards $125, but will instead cap around $110 per share 12 months from now – and that’s the good news.
After all, $110 is at least above the $102 and change that Nike stock is selling for today, implying there could still be up to 7% upside for the stock, which also yields a modest dividend yield of 1, 1%. So that’s about 8% potential profit despite the downgrade.
The problem is that the bad news seems to outweigh the good today. And the bad news is, too According to Barclays, there are at least five major interrelated factors working against buying Nike stock at this time. Specifically:
- China’s efforts to contain the spread of the coronavirus continue to keep this market “volatile”. More than that, Barclays actually sees risks increasing in China.
- Meanwhile, here at home, American retailers have too much shoe inventory.
- This oversupply of inventory creates “downside wholesale sector demand risk.”
- Consumer demand could continue to “erode” in the United States and Europe.
- Oh… and to top it off, the American company Nike is fighting against “FX [foreign exchange] headwinds” from Europe where weaker currencies there translate to fewer dollars earned on Nike’s bottom line here.
What happens when low demand meets too high supply? As StreetInsider reports, Barclays predicts it will trigger a series of promotions (i.e. discounts, i.e. sales, i.e. shrinking profit margins)” in U.S. retail” this fall and winter. And as the calendar shifts to spring 2023, Barclays expects that will result in a slowdown in wholesale orders from retailers for Nike shoes, hurting both sales and profits for the company.
If Nike is forced to lower its prices in order to move its own stock (or compete with rival shoemakers trying to move their inventory), it could spell the end of two consecutive years of increased gross profit margins for Nike and also reduce sales growth. And given that most analysts already see Nike’s earnings growing at around 8.5% per year over the next five years – according to data from S&P Global Market Intelligence — it could push Nike’s earnings growth down into the mid-digits or even below single digits.
Given that Nike stock is currently trading well above the average price-to-earnings (P/E) ratio for S&P500 shares – nearly 28 times earnings – Barclays no longer considers the stock cheap enough to buy. And me neither.
Rich Smith has no position in the stocks mentioned. The Motley Fool holds positions and endorses Nike. The Motley Fool has a disclosure policy.