Nike (NYSE:NKE) is the biggest seller of athletic footwear and apparel in the world. But these days, the retailing giant is best known to investors for a less brag-worthy reason: It was the single worst-performing stock on the Dow Jones Industrial Average last year.

More recently, as the Dow raced higher by 17% in the past 12 months, Nike has dribbled down to become one of just five members of the Dow to post a share price decline.

A jogger checks her fitness tracking device.

Image source: Getty Images.

It's good to be the king

You're likely aware that a sales and profit growth slowdown are behind the stock's slump. And, sure enough, revenue gains over the past 18 months were just 6%, compared to the double-digit pace Nike enjoyed in each of the two years before fiscal 2016. Gross profit margin is down, too, falling to 45% of sales over the last nine months compared to 46% last year. 

Yet the company is faring better than its smaller rivals. Under Armour (NYSE:UAA) (NYSE:UA) has seen its growth pace plummet from over 20% to just about even with Nike's, which boasts a far bigger sales base. On profits, Under Armour still edges out Nike -- but its profitability has dropped so fast that the gap is a lot smaller now.

UAA Revenue (Quarterly YoY Growth) Chart

UAA Revenue (Quarterly YoY Growth) data by YCharts.

Nike's revenue is protected by a wider selling infrastructure that sees just 50% of its business coming from the weakening U.S. market. Under Armour, by contrast, generates 85% of sales at home. That number is poised to drop closer to Nike's over the next few years, which will help its business. On the other hand, Under Armour's aggressive push into footwear could result in Nike soon passing it on profitability for the first time.

The steep online challenge

Nike's latest results describe a core weakness in the U.S. market that's being driven by a move toward online shopping. "The consumer has decided digital isn't just a part of the shopping experience," CEO Mark Parker said in a recent conference call, "digital is the foundation of it." 

The shift resulted in surprisingly weak store traffic last quarter, which forced many retailers to cut prices so they could keep inventory moving. "We don't expect this transition to be simple," Parker warned, since it will take more time before Nike's selling partners can whittle down their inventory levels to better match up with demand. In the meantime, the company plans to pour resources into its digital services. "We're aligning all of our firepower against the consumer experience."

Executing the plan

Like Under Armour, which is racing to get its products back up to the (less price sensitive) premium end of the apparel market, Nike's recovery plan is founded on innovation. The company aims to ramp up both the quality and quantity of improvements and new product launches that it makes in a given year. At the same time, executives are walking away from brands that just aren't cutting it right now, with as much as 25% of Nike's styles set to end production so the company can focus on the franchises that have the best potential.

Nike's shoe lineup.

Image source: Nike.

As upcoming examples, executives cited three new cushioning platforms coming to Nike-branded shoes over the next few months. Apparel fans, meanwhile, can look forward to a loaded pipeline of products aimed at blending sport clothes more seamlessly with everyday lifestyle.

Wins from the new strategy won't be obvious in Nike's headline results over the short term. In fact, revenue growth and profitability should be held back by spending on e-commerce initiatives and the overhang of excess inventory.

Over the long term, though, Nike and Under Armour both agree that the current sluggish industry dynamics create big opportunities to improve on their market positions. Yet Nike's global base, huge marketing budget, and deeper product portfolio give it formidable advantages over its smaller rival as they race to meet customers' rising expectations.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.