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Buy Nike Inc (NKE) Stock While the Market Panics Over Foot Locker

Luke Lango
Updated

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Nike Inc (NYSE:NKE) stock is selling off by about 4% today, and is down 7% for the week, amid an investor freak-out concerning the sports apparel and retail industries . Friday’s beating in NKE stock has come courtesy of simply miserable numbers from Foot Locker, Inc. (NYSE:FL).

Source: Shutterstock

The connection point seems rational. Foot Locker sells Nike shoes. If Foot Locker says comparable-store sales dropped 6% last quarter (versus estimates for a 0.8% gain) and that comparable sales will be negative for the next six months, that implies a source of Nike’s sales isn’t exactly trending up.

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Naturally, Nike stock drops.

But that’s an oversimplified way of looking at things, and Foot Locker’s struggles don’t actually say all that much (at least concretely) about Nike’s operations. In fact, you could argue that Foot Locker’s loss is ultimately better for NKE stock.

Here’s why.

Did You Already Forget Nike’s Report?

At the end of June, Nike shares soared following a stellar fiscal fourth-quarter report that saw the company beat on both the top and bottom lines. Sales jumped 7% year-over-year, with running apparel up 8% and Jordan brand sales better by 13%. Sportswear revenues climbed 17% in the period.

Nike achieved top-line growth across pretty much all major categories. That’s pretty much the proof you need that, at least recently, the athletic fashion trend is working in Nike’s favor, not against it.

However, the recent selloff has put NKE stock almost back to where it traded before Nike’s stellar Q4 numbers hit the tape.

The market is saying more recent results from Foot Locker and Dick’s Sporting Goods Inc (NYSE:DKS) are providing a bearish picture of the athletic segment. But the market might be wrong here, or at least looking at things the wrong way.

The Athletic Retail Picture

Athletic retail segment isn’t dying. It’s just shifting.

All the big active-wear retailers — Foot Locker, Dick’s Sporting Goods, Hibbett Sports, Inc. (NASDAQ:HIBB), Cabelas Inc (NYSE:CAB) and Big 5 Sporting Goods Corporation (NASDAQ:BGFV) — said business sucked last quarter. And yet, the big active-wear brands — Nike, Under Armour Inc. (NYSE:UAA), Skechers USA Inc (NYSE:SKX), adidas AG (ADR) (OTCMKTS:ADDYY), and Lululemon Athletica inc. (NASDAQ:LULU) — said business was actually pretty good last quarter.

Why the disconnect?

Active-wear brands are pushing direct-to-consumer over wholesale. That means brands like Nike and Skechers are selling less stuff to their wholesale partners, and instead investing in their own sales and distribution channels. Everyone assumes that means just digital sales; that’s part of it, but companies are also building and emphasizing their own branded brick-and-mortar retail stores, too.

Consider this:

  • Nike reported that Nike Brand wholesale revenue rose 5% last quarter, while direct-to-consumer sales jumped by 18%.

  • Under Armour reported skimpy 3% wholesale revenue expansion last quarter, but robust 20% direct-to-consumer growth.

  • Skechers? Domestic wholesale revs were up by 6%, paling in comparison to company-owned global retail sales that roared ahead by 28%.

Bottom Line on NKE Stock

There is a seismic shift in athletic retail right now from wholesale to direct-to-consumer. That really hurts retailers like Foot Locker and Dick’s Sporting Goods.

But it doesn’t say what the market thinks it does about athletic retail demand; at the very least, it doesn’t say it as loudly. The athletic retail pie is growing nicely, and people are just getting that pie somewhere else.

The market today is irrationally pairing NKE stock with Foot Locker. Yes, those two companies were highly correlated for the better part of the past five years, but that pairing has been rapidly breaking.

Nike wants to push its own retail stores and online experience, as well as sell through vendors such as Amazon.com, Inc. (NASDAQ:AMZN). Foot Locker’s struggles may not mean Nike is failing … but actually be a sign that Nike is simply executing on raising its DTC strategy.

Buy NKE stock on this dip. The selloff is overdone.

As of this writing, Luke Lango was long FL and NKE. 

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