While Nike's (NYSE:NKE) revenue growth for the past two quarters has come in at 7%, in line with its 10-year average, double-digit growth from rival Adidas (OTC:ADDYY) suggests Nike has been losing market share. Adidas has seen its stock shoot up over 40% in the last year on the back of 18% currency neutral revenue growth and a 41% jump in net income.
Nike's stock, on the other hand, is up less than 5% over the same period as gross margin weakness and a deceleration in its online business have investors wondering whether competitive pressure may be nibbling at the company's heels. But I wouldn't count Nike out for a second. Management announced a new deal to sell a limited product assortment on Amazon.com, and they are currently putting in place improvements to the product creation process that potentially lay the groundwork for a much stronger business going forward.
Partnership with a giant
For e-commerce, Adidas posted 53% growth in online revenue for its first quarter ended in March, while Nike reported growth of 18% for its fiscal third quarter ended in February. Over the last year, online sales growth at Nike has decelerated from 46% in fiscal 2016 to 30% for fiscal 2017. And in the latest report, gross margin fell 140 basis points to 44.1% due to currency headwinds and higher product costs.
However, Nike recently announced a new pilot program to sell its products directly on Amazon.com. Given the push Amazon is making into apparel and the fact that Nike was already one of the e-commerce giant's best-selling brands, this should be a nice boost for the company. The deal with Amazon is basically an extension of Nike's own online business and should shore up its battle with competitors.
But the company has a lot more going on to improve growth and profitability.
The game plan
Nike has been working to improve its supply chain to deliver product designs faster to the customer, which has also weighed on gross margin as these efforts require extra cost to implement.
But down the road, management expects this initiative to improve profitability, as a faster product creation cycle will allow Nike to sell more merchandise at full price by streamlining inventory, cutting out underperforming styles, and ultimately getting the latest trends out to customers before they have a chance to be lured away by other brands. Nike is also using these improvements to localize styles in order to drive consumer demand in select markets.
The company is reworking the entire process of how it designs, sources materials, and manufactures new products, all in the hopes of becoming leaner and delivering faster what customers want. Nike has several new products coming out, such as the new Air VaporMax, the ZoomX midsole, and the Nike Zoom Vaporfly 4% running shoe, which will give us an early indicator how these supply chain initiatives are working in the coming quarters.
Nike should bounce back
So while the company might have lost some ground recently, I'm not too concerned. With one of the most recognized brands in the world, considerable expertise in manufacturing and marketing, and strong relationships with suppliers, Nike can make the right investments now to reignite growth and potentially emerge as a stronger business in the next few years. Before these tailwinds take hold, this is a good time to think about adding Nike to your portfolio.