You don’t have to be an athlete to recognize that Nike (NYSE:NKE) is one of America’s top brands. Ordinarily, such a lofty distinction will put you in a great position in the markets. Unfortunately, two critical headwinds threaten to derail the party. NKE stock closed down almost 3% yesterday.
Source: Kristian Olsen Via Unsplash
First, we have competitive jitters clouding the overall athletic-apparel industry. Segment retailer Foot Locker (NYSE:FL), which up until mid-April had a solid showing in 2019 absorbed a nasty tumble. After releasing results for the first quarter that missed both earnings and revenue expectations, FL stock tanked 16%.
Of course, Foot Locker is highly dependent on Nike, with the iconic shoemaker accounting for roughly two-thirds of sales. In turn, Nike is shifting toward online sales and direct retail channels, which obviously hurts FL stock.
However, the broader takeaway is that the American consumer is cutting back on discretionary spending. After all, Foot Locker had a strong showing for Q4, including much better-than-expected same-store sales. Therefore, the curbing of spending habits will invariably hit NKE stock.
But the bigger headwind impacting Nike stock and the entire athletic-apparel segment is the bitter U.S.-China trade war. Nike’s management team, along with their rival counterpart Under Armour (NYSE:UA, NYSE:UAA) and other shoe retailers, urged President Trump to back down.
The reason of course is obvious. If you have a slowdown in sales at home, China’s emergent economy and billion-plus consumer base represents an easy solution. But with Trump’s fierce rhetoric causing an equally outraged response, the Chinese are in no mood to play ball.
Although I like NKE stock based on its fiscal stability and segment domination, geopolitics must be respected.
Protracted Trade Dispute Threatens Nike Stock
Here’s the thing: if the world’s top two economies can settle their differences now, we’re back to the natural order. Nike stock jumps on powerful Chinese demand, and a stabilizing North American base.
But what’s the likelihood of that scenario? Given recent political and international headlines, I believe the current signs bode poorly for NKE stock.
Over the past weekend, Japanese Prime Minister Shinzo Abe played the charm offensive toward President Trump. The reason? To get Trump to listen to reason regarding the White House’s “shotgun” tariffs. Specifically, the President threatens to penalize both Japan and the European Union unless they renegotiate supposedly unfavorable trade deals.
Japanese auto giant Toyota (NYSE:TM) responded incredulously, citing their massive investments toward American infrastructures and jobs. In my opinion, they’re right to be outraged. A true capitalist businessman would understand that competition breeds superior offerings for consumers.
Besides, Detroit has had at least four decades to improve their craft. It’s not Toyota’s fault that they stink.
But the bigger takeaway as it relates to NKE stock is Trump’s mentality. Apparently, he has zero qualms about hurting regions that are net accretive to U.S. economic interests. How much more will he aggressively attack China, which is very much our ideological adversary?
Admittedly, it’s not all bad news for Nike stock. The underlying company is gaining ground in China. Moreover, management views the Asian juggernaut as a largely untapped opportunity. Plus, the average Chinese consumer loves American brands.
However, that demand faces threats because Nike doesn’t have a monopoly in athletic fashion. Principal rival Adidas (OTCMKTS:ADDYY) has also gained significant momentum with Chinese millennials, particularly with its Yeezy brand.
Clearly, this reignited conflict is coming at the worst possible time for Nike stock.
Technical Posture for NKE Stock also a Bad Omen
I realize that even among InvestorPlace contributors, a debate rages between the technical and fundamental approaches. Granted, some of the assertions from technical analysts are a bit on the wonky side.
But I also think real value exists when both the fundamentals and technicals confirm the same narrative. Fundamentally, the U.S. consumer market has notably weakened, sending FL stock into the dumpster. However, hybrid producer/retailers like NKE don’t have a Chinese emergency valve anymore. That obviously hurts the case for Nike stock.
And its technical chart gives you all the information you need to know. After hitting a peak this year in the second half of April, Nike stock is conspicuously pensive. It’s roughly the same situation for American athletic-apparel makers.
But the obvious winner in this mix is the decidedly not American Adidas. ADDYY shares have soared 38% year-to-date. Arguably, Adidas has better reach with Chinese consumers. On the other hand, Nike is losing its grip with both American and Chinese customers. Combined, these are good reasons to stay cautious on NKE stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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