Competition From Under Armour And Adidas Could Continue To Weigh On Nike

Nike's ongoing headwinds were highlighted in a research note by Morgan Stanley's Jay Sole.

3 Signs Of Headwinds

According to Sole, there are three signs Nike's business is slowing down: 1) U.S. sales in the fourth quarter were flat year-over-year and 1,100 basis points below the eight quarter average, 2) gross margin fell 26 basis points year-over-year, which marks the first time this happened in 14 quarters and 3) earnings per share growth was flat compared to a 22 percent growth over the past three quarters.

Related Link: Nike's Q4 Earnings: Despite Growth, Currency Headwinds Remain An Issue

Sole further pointed out that on the one hand, Nike's headwinds could be short-term in nature and the company will soon return to 10 percent top-line growth. On the other hand, Nike could be at an inflection point where competitors are now limiting its rate of market share gain.

Bear-Case Scenario And Current Rating

Under a bear-case scenario, Nike will fail to meet sales targets as adidas AG (ADR) ADDYY and Under Armour Inc UA continue to take share. Should this scenario continue to play out, shares of Nike could trade as low as $38 per share. On the other hand, shares of Nike could trade as high as $72 per share if Nike dominates over its competitors.

Sole's price target and stock rating of Equal Weight and $60 per share assumes a middle ground scenario between the two scenarios.