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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