NKE Nike Inc

By Sara Germano 

The Olympics may be over, but Nike Inc.'s competition is just heating up.

For years, Nike has held the dominant position as the world's largest sportswear maker. But results from the company's latest quarter, released Tuesday, fanned some fears that Nike's stranglehold on the athletic apparel and footwear market could slip.

Lower than expected orders from wholesale partners, along with recent retail data which shows Under Armour Inc. and Adidas AG gaining share in key categories, as well as a broad influx of upstart athletic brands all combined to send rattles through the market about Nike's progress.

The company reported fiscal first-quarter revenue and earnings growth, but fell below Wall Street's expectations on future wholesale orders and gross margins. Several brokerage analysts downgraded their price targets on Nike's stock, which closed down 3.8% at $53.25 on Wednesday. The shares are now down 15% on the year.

Among those lowering their targets were Credit Suisse analysts, who wrote early Wednesday that "we are becoming increasingly concerned that the quality of results is deteriorating, as top-line trends in key markets look shaky, gross margin pressure is persistent, and the company is reducing disclosure."

Nike executives acknowledged Tuesday they faced increasing competition but said growth in the sportswear and footwear markets continues to outpace the global economy. "It's a great time to be in the business of sports and as the market leader, this is a great time to be Nike," CEO Mark Parker said on a conference call.

New research shows the strength of the so-called athleisure market, broadly referring to clothes and shoes intended for fashion rather than sport. For the year through August, less than one-third of activewear sales were intended for actual athletic activity, the lowest such proportion in four years, according to consumer tracking firm NPD Group.

"Because activewear is so broadly used, available, and defined by the sports and fashion industries, some of the bigger, authentic brands are feeling pressure," said NPD analyst Matt Powell. On the low end, Nike is competing with mass-market chains such as Old Navy that sell $15 yoga pants, while Savile Row tailors are now making bespoke tracksuits.

A Nike spokesman said the company's relationships with elite athletes as well as insight to consumer trends helps it create products that appeal "to a wide audience, while also infusing sportswear with performance benefits."

Jay Sole, an analyst for Morgan Stanley, said it's "an open, and very important question" as to whether Nike can stop rival Adidas from taking share in the casual category, which has been driving growth in the overall athletic sector. "Lately [Adidas's] efforts have been more successful and the new stuff hitting stores for holiday may continue to beat Nike's despite best efforts," he said.

Meanwhile, Under Armour has begun selling high-end athletic gear at Barneys New York and has announced plans to stock shelves at Kohl's Corp. stores beginning early next year. Both retailers have been important Nike accounts.

Nike, for its part, has been working to separate itself from the pack. The company is betting it can expand its direct sales to $16 billion by 2020, or roughly a third of revenue, lessening its reliance on wholesale partners. In the fiscal year ended May 31, direct-to-consumer revenue was $7.8 billion, or roughly 25%, of Nike brand revenue.

To underscore those efforts, Nike said Tuesday it would change the way it reports wholesale orders. Chief Financial Officer Andy Campion said the company would limit its reporting of so-called futures orders -- which measures growth in shipments due to wholesale partners over the next six months -- to guidance on earnings calls and details in its regulatory filings.

Nike has also worked to develop products that appeal to both workout junkies and the athleisure crowd. On Tuesday, Mr. Parker called out the company's newly released LunarEpic running shoe, which he said "is also translating extremely well to a style audience and it's selling through well beyond expectations."

Write to Sara Germano at sara.germano@wsj.com

(END) Dow Jones Newswires

September 28, 2016 17:11 ET (21:11 GMT)

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