Morgan Stanley and Merrill Lynch agree on Nike’s losing its mojo

Retail market analysts at Morgan Stanley and Merrill Lynch agree on the threats waiting ahead for Nike, which seems to be losing its mojo and, therefore, its market share.

Shares at Nike Inc. (NYSE:NKE) were downgraded by Morgan Stanley and Merril Lynch on Wednesday, on a matter of hours. Both brokers pointed out a potential sales slowdown in Nike’s domestic market.

Their concerns are partially based on data gathered by SportScan that reveals how US core channel sales at Nike have retreated 1 percent. The analysis shows that this decline responds to a shift in consumption patterns away from brick-and-mortar Nike stores, toward online shopping and several bankruptcies in the retail world.

Morgan and Merrill point to a more fragmented market to weight on Nike’s business

A more fragmented market given the entrance of new competitors has also contributed to the shrinking size of Nike’s market share.

"Many new entrants are fragmenting the market and Nike is lapping five years of double-digit growth. Retail bankruptcies and consumers' shift to online shopping has created heavy excess inventory, which is causing LSD ASP declines. We believe Nike's challenge has been compounded by a major supply chain issue. Off-price channel sales are helping offset and clear goods, but current dynamics could last through CY16," said Sole.

Citing all these factors, Morgan Stanley’s analysts have downgraded to ‘Equal Weight’ from ‘Overweight’. Leading analyst Jay Sole also pinpointed some internal problems from Nike's supply chain that have led to an excess of inventory.

Finally, Sole add that the recovery of direct competitors such as Adidas, which is regaining its lost territory within the US, is definitely affecting Nike’s position in its home market. “These facts, plus recent US retailer commentary, suggest trend sustainability. UA's Steph Curry basketball footwear has taken 800 bps of share from Nike YTD: We think this shift may slow in 2017, but for now UA continues to aggressively pursue market share and the strategy is working,” summed up the analyst.

Both Morgan Stanley and Merrill Lynch downgrade Nike’s shares

Based on these factors, Sole has reduced his earnings estimate for Nike for the fiscal year 2017 from 2.49 to 2.38 dollars, while target price has also been slashed from 69 to 60 dollars apiece.

Meanwhile, Merrill Lynch has also downgraded Nike from ‘Buy’ to ‘Neutral’. Analyst, Robert Ohmes concurs with Morgan Stanley when says that Nike is beginning to pay the toll of increasing competition. The firm said that the company is beginning to lose its share in the North American market for the first time since 2010.

Merrill Lynch also states that Adidas and Under Armour are now leading the growth in market share. The firm’s channel checks reveal excess stock in outlet stores with steep markdowns, owing to weakness in apparel and technical footwear sales. Thus, Ohmes has cut back its target price from 72 to 60 dollars per share.

Image: Nike Web