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Workplace Environment Is Latest Concern for Nike Inc (NKE) Stock

Nike Inc (NYSE: NKE) is the latest company to be hit by accusations of workplace misconduct by top management. On Thursday, Nike announced the resignation of brand president Trevor Edwards following an internal probe of workplace behavior.

Nike didn't go into the details of the circumstances that lead to Edwards' resignation, but in an internal memo, CEO Mark Parker referred to types of behavior "occurring within our organization that do not reflect our core values of inclusivity, respect and empowerment."

[See: Finish First With Athletic Apparel Stocks.]

Edwards played a role in Nike's recently announced restructuring plan, which involves cutting 1,400 employees and reducing its number of product offerings. Nike has struggled to adjust to a lackluster North American athletic apparel sales environment in recent quarters, reporting negative earnings per share growth in each of the past two quarters.

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Nike stock has held up relatively well compared to peers such as Under Armour ( UA, UAA) due to Nike's exposure to high-growth international markets. In the past three years, Nike shares are up 38.4 percent while Under Armour stock is down 58.1 percent.

Investors didn't react much to the news of Edwards' departure on Friday morning, sending the stock lower by less than 1 percent. Analysts see a tough road ahead for Nike with or without Edwards.

Bank of America analyst Robert Ohmes says Nike investors face a number of risks ahead, starting with its steep stock valuation. In addition, Ohmes says expectations for Nike's 2018 product launches are dangerously high.

"Nike's full-year guidance is reliant upon an acceleration of new platforms (VaporMax, React, ZoomX), which may not become large enough to offset revenue shortfalls in Nike's core platforms (such as Roshe and Free) that are now being discounted at retail," Ohmes says.

[See: 8 Sports Companies to Game the Stock Market.]

Ohmes says Nike's inventory levels as a percent of sales were recently at their highest levels since fiscal 2003. Plus, Nike will not get the tailwind from U.S. corporate tax cuts that many other U.S. companies will get due to its high percentage of overseas profits.

"We see downside to NKE's current P/E multiple given market share pressure in the U.S. and difficult International comparisons, which offset strong direct-to-consumer momentum and strength in China," Ohmes says.

Bank of America has an "underperform" rating and $42 price target for NKE stock.



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