Will Nike Inc (NYSE:NKE) Recover From Its $50 Billion Curse?

Nike Inc (NYSE:NKE) recently reported its fiscal 2018 first quarter results where earnings per share beat expectations by a significant margin. Despite the initial rally from the positive earnings report, Nike shares whipsawed and trended lower.

Nike reported declining revenues in North America, while other international markets such as Europe, Greater China, Africa and the Middle East contributed about 55% of the company’s revenues in the first quarter. The company acknowledged that international markets would continue to contribute to future sales growth even as the North American market seems to be on a downtrend.

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The company is also facing stiff competition from other athletics manufacturers such as Adidas, which recently overtook Nike’s Jordan brand as the second most popular athletic footwear brand. The company’s overall margins have recently declined significantly due to stiff competition in the athletics retail industry from companies such as Under Armour Inc (NYSE:UAA), Skechers USA Inc (NYSE:SKX) and Deckers Outdoor Corp (NYSE:DECK).

In 2015, Nike announced the audacious goal of netting $50 billion in sales by fiscal 2020. The company is currently in fiscal 2018 and is not close to meeting this bold target. Many analysts have termed this goal as Nike’s $50 billion curse since the company has not come close to generating the necessary sales growth required to hit this goal.

The company’s sales and profits peaked in 2015 and Nike has been unable to generate similar growth and profit numbers since this peak. The company has been beset by stiff competition in North America and globally, which has forced it to lower its prices, leading to lower gross margins,

The company’s lower margins are forcing it to make more sales in order to generate the same profits as in the past, which is what has contributed to the flat revenues reported by Nike recently, as well as the lower net profits reported.

The company has room for future growth even as it focuses on selling directly to end-consumers while focusing on expansion into new markets. The question remains whether Nike is a good long-term investment at its current valuation.

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