Here's Why It's Time for a Fast Break From Nike (NKE) - TheStreet

Nike (NKE) - Get Report execs did just about all they could on Tuesday evening to paper over the reality that the sneaker king is playing in a new, more globally competitive environment.

Speaking from prepared remarks for over 43 minutes, Nike's team waxed poetic on the demand comeback for LeBron James and Kevin Durant sneakers following each player's high-profile playoff push (and in the case of Durant, his recent decision to jump ship to the popular Golden State Warriors, which prompted Nike to unleash a special-edition sneaker). Also, Nike made it clear that it owned the Olympics, with its athletes winning a boatload of medals and subsequently fueling product sales.

Toss in some good numbers around digital (online sales rose a strong 49%) and demand in China -- still solid despite rising competition from Under Armour (UA) - Get Report and the country's growth slowdown -- and on the surface it looked as if Nike didn't deserve to see its stock plunge as much as 4.5% in after-hours trading. (Under Armour is part of TheStreet'sGrowth Seeker portfolio.) 

But it's buyer beware on Nike, even considering the stock is about 13% cheaper from the start of the year. For beginners, Nike has to restructure its earnings calls.

To have execs speak for over 43 minutes following a quarter that was truly mixed, and giving analysts 20 minutes to ask one question each is embarrassing for such a heavily covered company. Nike shouldn't be trying to close down the access to information when it posts something so-so, but rather open the door to try to sell the sizzle. At least Walmart (WMT) - Get Report holds a call with the media to explain its quarterly results (though it should ditch its pre-recorded earnings calls and hold an open, live dialogue with analysts).

Indeed, Nike has some sizzle to sell in terms of new product introductions looming around the corner. It still has a dominant position globally, something it's failing to reinforce amid 43-plus minutes of mostly reading from the financial statements. Now is the time Nike should be picking up its disclosure game, not shutting off the spigot. Besides this little issue, the fact is Nike's valuation gap to others in retail deserves to continue to be closed by investors.

A couple of things stood out:

Nike is selling more in the off-price channel. Execs continue to try to pass it off as a one-quarter thing, but that couldn't be further from the truth. Inventories remain out of balance in the U.S. and Nike continues to pay the price for it with its profit margins. Gross margins plunged about 200 basis points year over year in the quarter. Nike went on to slash its full-year gross profit margin outlook following the weaker-than-expected results. By selling more in the off-price channel, Nike has opened the door to tarnishing its once-premium brand. The stuff is everywhere at Marshall's!

Nike's futures orders in North America rose 1%, badly missing forecasts for a 5% increase. Want the prime reason why Nike shares have done squat this year? It's due to rising competition from Under Armour and Adidas, an element that is playing out in the North American futures orders.

Retailers are saying they want to allocate their inventory dollars to other brands that are resonating with consumers. One could hear the acknowledgment of the changing competitive dynamics increasingly on Nike earnings calls. Although Nike reaffirmed its commitment to providing futures orders numbers, the clock is ticking on this unnecessary disclosure given weakening performance and how media are fixating on the negative.

Nike's signature basketball business is nowhere near back to experiencing the rip-roaring growth Wall Street has long projected. The business continues to be devoid of the bullishness that Nike execs heap on the sportswear, Jordan and running categories. In reality, Nike will likely have to drop prices on more high-profile basketball sneaker launches in order to wrestle share away from Under Armour's Stephen Curry brand. Doing so will open an entire can of worms for Nike, chief among them being that Nike's earning megabucks from its innovation investments. That, in turn, will beg the question whether it needs to seriously consider a massive cost-cutting program in order to get out in front of a globally changing industry dynamic.

Let Nike do its thing with self-lacing sneakers and a new watch with Apple (AAPL) - Get Report this fall. If one wants to make money in what clearly remains a bull market in sneakers, Foot Locker (FL) - Get Report is the way to go -- though keep an eye on Finish Line (FINL) ; its new store designs look great. (Nike and Foot Locker are part of TheStreet'sTrifecta Stocks portfolio. Apple is part of the Action Alerts PLUS portfolio.)

Editor's Note: This article was originally published at 10 a.m. EDT on Real Money on Sept. 28.

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