It’s hard for investors to accept when a company is too expensive. I’m not suggesting that investors try to time the market, but some common sense does need to be applied when looking at what stocks to buy and sell. There is a great brand that is known the world over, but just because a company has a great brand, doesn’t mean the stock is a buy at any price. Unfortunately, it looks like difficult times are ahead for shareholders of NIKE, Inc. (NYSE:NKE).
You Couldn’t Have Said This Even 10 Years Ago
If this were ten years ago, it would be hard to argue that Nike was a company facing serious competition. The company used to have an ongoing battle with Reebok, and of course other companies have been around for a while too, but ten years ago, two of Nike’s biggest threats didn’t exist.
This Global Brand Isn’t As Global As You Think
One of the challenges facing Nike is, the company is very reliant on the North American market. While it’s true that Nike is a global brand, nearly 62% of their total earnings before interest and taxes comes from North America.
The reason Nike’s reliance on the domestic market is an issue is, both Under Armour and Lululemon are growing much faster than NIKE, Inc. (NYSE:NKE) in North America. Under Armour has tremendous growth prospects worldwide, but in the last quarter, 94.1% of their sales came from North America. Lululemon Athletica inc. (NASDAQ:LULU) saw 61% of their sales come from the U.S., and 34% from Canada in the last quarter. These two disruptive companies have already cut Nike’s sales growth, and as they become bigger brands, this challenge will only increase.
Competition Is Getting Tougher In This Market
The second challenge facing Nike is, an increasingly difficult environment in the footwear industry. Not only does Nike face the very real challenge of trying to one-up Under Armour Inc (NYSE:UA) in footwear, but both companies face numerous other foes.
Consider that Amazon.com, Inc. (NASDAQ:AMZN) currently carries 19,285 choices of athletic shoes priced between $50 and $100. If you begin to consider the number of competitors, the choices are dizzying. Old challengers like Reebok, Adidas, and New Balance still exist, but they are joined by ASICS, Skechers, Vans, and newer entrants like Teva and even Crocs, Inc. (NASDAQ:CROX). With so many choices, and each company trying to compete with better products, NIKE, Inc. (NYSE:NKE) is the category leader that everyone is aiming for.
You May Think You Have Heard All Of This Before
I’m sure some investors are thinking, I’ve heard all of this before. They may even think, Nike has faced serious competition in the past, and is still doing well, what’s different this time?
This brings us to the third challenge facing Nike, and that is their margins are lower than their two toughest competitors. In the last quarter, Nike’s gross margin was 44.2%. By comparison, Under Armour managed a gross margin of over 50%, and Lululemon Athletica inc. (NASDAQ:LULU) reported a 56.5% gross margin. Since Under Armour gets over 77% of its sales from apparel, and Lululemon gets the majority of its sales from apparel as well, they have an inherent advantage over Nike.
With Under Armour focused on expanding its selection into footwear, and pushing for an increased presence in women’s clothing, NIKE, Inc. (NYSE:NKE) will continue to feel margin pressure in these areas. Lululemon on the other hand, is beginning to position itself as a brand that can appeal to both women and men. In addition, the company is trying to expand their reach beyond their traditional yoga customer.
Serious Competition And Potentially Overvalued Shares
The fourth and final reason to consider selling Nike is the stock’s current value. Investors seemed impressed with the company’s last earnings report. The problem is, while the company’s revenue increase of 9% looks good, the company’s 20% increase in diluted EPS was a bit of an illusion. Nike’s income before taxes was up 9%, but a 10% lower tax rate and share repurchases caused the company to grow EPS by 20%. If the company can’t manage this low of a tax rate again, EPS comparisons will become more difficult.
Nike shares now trade for over 22.6 times projected 2013 earnings. Analysts are calling for 11.13% EPS growth over the next five years, which gives the stock a PEG ratio of 2.03. By comparison, Under Armour sells for 38 times projected EPS, but is expected to grow almost twice as fast at 21.37%. Lululemon Athletica inc. (NASDAQ:LULU) sells for 33.9 times projected earnings, but is actually expected to grow even faster at 24.20%. With Under Armour selling for a PEG of 1.78, and Lululemon carrying a PEG of 1.4, it’s clear the market has placed a premium on NIKE, Inc. (NYSE:NKE).
The bottom line is, Nike isn’t in the same position as ten years ago. Under Armour and Lululemon Athletica inc. (NASDAQ:LULU) are prepared to continue taking market share and compressing Nike’s margins. Nike’s reliance on footwear is a challenge in an increasingly crowded market, and the stock is valued more highly than competition that is growing much faster. Sorry Nike fans, but the swoosh you hear, might be the wind going out of Nike’s stock price in the near future.
The article 4 Reasons It Might Be Time To Sell This Blue-Chip originally appeared on Fool.com and is written by Chad Henage.
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