JPMorgan downgrades Nike, sees slowing sales and earnings miss

Key Points
  • Nike underperformed the market in the past year with its shares down 1 percent through Thursday compared to the S&P 500's 17 percent return.
  • JPMorgan lowers its rating on the company's shares to neutral from overweight, saying Nike will miss earnings expectations next year due to slowing sales and increasing product discounting.
Trading Nike on the JPM downgrade: 4 picks

It has been a difficult year for Nike shareholders. And now Wall Street is saying the company's financial results will get "worse before better."

JPMorgan analyst Matthew Boss told investors Nike sales will weaken and the company will miss earnings expectations next year in a note to clients Friday. As a result, he lowered his rating for Nike to neutral from overweight.

Nike announced plans to cut 2 percent of its workforce Thursday.

"Putting the pieces together, we are encouraged by mgmt's more efficient SG&A [selling, general and administrative expenses] approach (i.e. 2% global workforce reduction) and forward thinking initiatives (speed/innovation), but change takes time with N/A marketplace disruption and elevated promotional activity pressuring mgmt's mid-teens algorithm," Boss wrote in the report. "Based on our work, we see the N. America top-line picture likely worse before better modeling flat N/A revenues in FY18."

Nike underperformed the market in the previous 12 months with its shares down 1 percent through Thursday compared to the S&P 500's 17 percent return.

The analyst lowered his price target for Nike to $58 from $61, representing 10 percent upside from Thursday's close.

Boss cited how approximately 50 percent of Nike's sales are generated in North America and sales in this geography grew only 3 percent in the past year versus the 12 percent growth average in the previous four years.

Nike cut to neutral at JPMorgan

He also noted increased discounting on Nike products at Dick's Sporting Goods, Kohl's, Macy's and J.C. Penney stores.

"Our work points to continued elevated promotional activity at both wholesale and retail driven by retail consolidation and increased competition with the signature basketball category taking longer to rebound by our work," he wrote. "Specifically, ~25%-off has become more/less the starting point for Nike product by our channel work."

Boss reduced his Nike earnings per share estimate for fiscal 2018 to $2.40 from $2.45 versus the Wall Street consensus of $2.54.

Nike did not immediately respond to a request for comment for this story.

The company's shares are down 4 percent midday Friday after the report.

— CNBC's Michael Bloom contributed to this story.