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

Nike Inc (NYSE: NKE) saw its stock trade lower by nearly 7 percent after Tuesday's market close in reaction to a concerning fourth quarter earnings print.

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) (OTC: ADDYY) and Under Armour Inc (NYSE: 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.