Nike's Getting Back In Shape While Under Armour Slows Down

Supply Chain Bottoming

Analysts Jay Sole believes supply chain trends may have troughed, given the sales drop and shipment guidance miss reported by key Nike supplier Feng Tay for the third quarter and the 5 percent fourth-quarter footwear production growth guidance issued by it.

Clearing Inventories

Morgan Stanley noted that Nike has been cancelling deliveries to retailers and declining to take overs in the last few months, as it seeks to overcome oversupply problems. Consequently, the company's U.S. inventories are now cleaner, down 0.8 percent year-over-year, the firm noted.

Related Link: Nike Beats Out Under Armour For Chelsea Football Apparel Deal Worth $1.1 Billion

Credible Threat From Adidas

However, the firm believes Nike's recovery could hit the roadblock as Adidas breathes down its neck, snatching share from it in the U.S. market. Estimates pitch adidas' U.S. footwear sales growth at 42 percent year-over-year, backed by strong product offering with styles such as Yeezy by Kanye West and NMD by Pharell Williams.

Although Morgan Stanley concedes that Nike's pipeline is stronger too, it expects a rebound in Nike's performance versus adidas at the earliest by the spring of 2017.

Premium Troubles For Under Armour

While commending on Under Armor's Speedform premium range of U.S. running footwear business, Morgan Stanley sees soft order growth due to falling ASPs. The firm expects the new $99.99 Slingride to be a potential offset, but sees at 20 percent markdown in 10 of 20 styles.

Moreover, the firm is of the view that Slingride sales may be cannibalizing sales of Under Armor's higher priced knit shoe, the Slingshot. Unless the company competes better at a premium price, Morgan Stanley believes, Under Armour will miss Street expectations.

Outlook for Suppliers

As far as suppliers are concerned, Morgan Stanley is Overweight on Feng Tay, Toung Loong Textile and Eclat. The firm expects near-term trends to be volatile and that it would take at least another quarter for industry inventory levels to normalize. However, the firm believes Taiwan suppliers' niche/premium/new products being favored by branded customers and order levels for these companies improving over the coming quarters.

Related Link: Under Armour's Growth -- The Source Of Buy-Side Debate

Ratings, Price Targets

• Adidas: Equal Weight.
• Nike: Equal Weight; $60.
• Under Armour: Underweight; $31.

In pre-market trading, shares of Nike were down 0.27 percent at $51.48 and Under Armour was down 0.83 percent at $38.17.

Full ratings data available on Benzinga Pro.