Nike Dominance Cannot Last Forever
Comment of the Day

March 22 2016

Commentary by David Fuller

Nike Dominance Cannot Last Forever

Here is the opening of this topical article from Bloomberg:

Nike's got a target on its back. 

The world's largest athletic gear maker on Tuesday reported yet another quarter of stellar earnings -- its 22 percent year-over-year growth in adjusted EPS flew past Wall Street's 9 percent estimate and marked seven consecutive quarters of double-digit earnings growth. But the company's stock dropped by more than 4 percent in after-market trading. 

In fact, while Nike's stock has soared by 27 percent in the past year, some of its competitors have actually done better. For instance, shares in Adidas have risen by 43 percent during the same time. 


At $8 billion in revenue for the quarter ended Feb. 29, Nike reported slightly lower sales than Wall Street expected. Investors also remain concerned about a pullback in the U.S. market -- growth in future orders (Nike's estimates for wholesale orders for the next six months, an important demand indicator) was 10 percent, instead of the 12 percent Wall Street expected. Its fiscal 2017 guidance came in lower than what investors expected. Plus, Nike beating earnings estimates wasn't really a surprise: Nike has missed Wall Street estimates only three times since 2005.

Playing The Game

It's not uncommon to play the estimate game well; companies in the S&P 500 index surpass Wall Street's estimates about 70 percent of the time, according to Bloomberg data covering the past 10 years. But Nike is unusually consistent -- at times a little boring, even, as its sales climb steadily higher. 

Much of that has to do with Nike's dominant position in the market; it brings in more annual revenue than Adidas, Under Armour, Lululemon and Skechers combined.  Its marketing prowess, including its ability to attract top celebrities to pitch its goods around the world, has so far been unmatched. 

David Fuller's view

Forever is a long time.  However, Nike remains one of the most successful retailers ever.  It has morphed from a sportswear and sports products manufacturer to the leader in the sports fashion industry.  This is one of the biggest and fastest growing industries on the planet. 

Consider the range of sports shoes, particularly the bestselling category known generally as trainers.  A long time ago they were mainly for athletes.  Today, trainers are worn by any sensible senior citizen out for a stroll.  They are also worn by everyone else, right down to young children because they are comfortable and grip better on most surfaces than other shoes. How many other products are appropriate for all generations?

Today’s trainers are also cool, because they are produced in an ever changing variety of styles, from plain single colours to multi-coloured hip-hop fashions.  Trainers are also promoted by sports heroes and heroines. 

Nike and other top manufacturers are at the cutting edge of sports shoe technology, in terms of materials for lightweight comfort, stability and endurance.  Seams in trainers have mostly been eliminated, for comfort and so that they can be manufactured easily by machines.  Nike has recently unveiled its self-lacing sneakers, with sensors which register a person’s weight and foot position.  They will also remember the wearer’s own, preferred setting.  

Last but not least, the Nike swoosh is the coolest sports logo by far.  Some other sporting goods manufacturers may be able to match or even temporarily surpass Nike’s products, but they have not come close to producing a better logo than the swoosh. 

  For investors, the top three athletic gear manufacturers are: Nike which has the commanding lead; Adidas which has reinvented itself, and Under Armour which is comparatively new.  Note: these are expensive momentum plays, best purchased following setbacks.  

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