Nike Is In The Midst Of A North American Correction

Following the release of Q1 results by Nike Inc NKE, Goldman Sachs said the company is in the midst of a North American correction, strangulated by overheated wholesale orders, excess inventory and tougher competition.

Analyst Lindsay Drucker Mann, however, stated that such resets aren't new to Nike, having experienced it in Western Europe in 2012 and in China in 2013. Drawing clues from these, the analyst said the reset at North America could take five quarters to complete, with inventory destocking and compelling new products a part of the turnaround playbook.

Related Link: Nike Is In An 'Innovation Reset', Brean Downgrades Stock

Challenges for Resets

Goldman believes the challenge would be from competitors like Adidas and Under Armour Inc UA, which have strong momentum anchored in compelling innovation. Therefore, the firm said visibility is more muddled than a typical reset exercise.

The firm said it lacks a clear line of sight despite Nike aggressively working down excess inventories. Goldman noted the company has a strong track record in restoring a pull market, where demand outstrips supply. The firm assumes a recovery for the North American business by the fourth quarter of 2017.

Updating Estimates

Reflecting subdued outlook for North America, Goldman lowered its EPS estimate for 2017 to $2.28 from $2.35, for 2018 to $2.51 from $2.67 and for 2019 to $2.88 from $3.02.

Goldman's price target for shares of Nike was reduced to $62 from $66, applying a P/E of 24 times its updated 12-24 months forward earnings per share estimates.

At time of writing, shares of Nike were down 2.20 percent at $54.14.