Changes in consumer shopping habits and tastes are creating challenges for sporting goods brands and retailers.
Analysts went on a downgrading and price-cutting spree in the sporting goods sector as some of the biggest names in the athletic arena – from Nike Inc. to Foot Locker Inc. – struggle to clear hurdles created by changing tastes and buying habits.
The rating and price-target changes came from many directions, but all expressed concerns that both brands and retailers will be challenged to show sales growth, earnings increases, and market share expansion.
“Nike remains a top brand in a solid industry, but our mosaic of five data sources suggests growth and margins are at risk ahead,” Jefferies analysts led by Randal Konik said in a Monday note.
Jefferies cites data showing Adidas AG ADS, -0.79% is snapping up website visits, market share, and brand share of top-selling running merchandise. Analysts also say Adidas is coming up more on earnings calls for retailers like Foot Locker FL, -6.46% and Finish Line Inc. FINL, -9.13% indicating the threat it poses.
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“Nike NKE, -2.44% has become increasingly expensive, with shares trading near historical averages, despite a more muted near-term growth profile,” Jefferies wrote.
Adidas has roared back in North America, analysts said, with the company’s retro styles driving growth in the region. Jefferies estimates that the Stan Smith and Super Stars sneakers accounted for about €290 million, or 19%, of North American Adidas sales in 2016.
That retro trend has cooled in 2017, but the brand hasn’t.
“To our surprise…, Adidas has been successful in leveraging the spark from its fashion retro footwear resurgence into other categories like running and athletic apparel,” the note said.
One reason to be optimistic about Nike is the brand’s increased emphasis on direct-to-consumer (DTC) sales, Jefferies analysts said. However, that’s one reason why Foot Locker was downgraded at least four times on Monday.
“While brands have been pushing DTC for years, those businesses are much bigger today, and much bigger contenders for industry market share as they grow from a larger base,” wrote UBS analysts led by Michael Binetti.
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UBS downgraded Foot Locker to neutral from buy, and slashed its price target to $37 from $70. Analysts continue to recommend Nike, which they give a buy rating with a $66 price target.
“For Foot Locker, in particular, while many of its stores are among the most compelling retail experiences in our U.S. specialty coverage group, we think the company will have to significantly accelerate closure of its lower-tier stores to properly absorb market share shift to the brands own DTC businesses (and to Amazon),” the note said.
Analysts say that for the first time, UBS’s Evidence Lab survey found that more shoppers prefer to buy their Nike gear on Amazon AMZN, -0.72% than at a Foot Locker store.
Baird analysts fear that downward top-line trends will continue further into the future than anticipated. And while they acknowledge “the risk of overreacting,” the Baird note cites “nonexistent earnings visibility,” category headwinds, and fears of an oversized footprint, with Foot Locker’s 3,300-plus stores housed in largely in malls.
Baird downgraded Foot Locker to neutral from outperform, and cut the price target to $37 from $65.
Foot Locker was also downgraded at J.P. Morgan, to neutral from overweight with its price target cut to $37 from $54, and at Canaccord Genuity, with its price target cut to $39 from $64.
“At issue is a soft product cycle, broadening distribution of similar product, and rapidly changing consumer brand preferences,” wrote Canaccord analysts led by Camilo Lyon, emphasizing the “need for speed” across retail.
While Foot Locker is working towards cutting lead times, Canaccord doesn’t see that strategy having an impact until next year.
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“With deep promotions likely to plague the U.S. market through year end coupled with trends that suggest future innovation is coming in lifestyle and running silhouettes (less so in basketball), we believe Foot Locker comps could be under pressure until mid-2018,” analysts wrote.
Susquehanna Financial Group analysts are slightly more bullish on Foot Locker, saying in a Monday note that though they overestimated the retailer’s ability to push back against marketplace challenges and should’ve downgraded shares previously, they “believe the worst is behind Foot Locker.”
Still, they nearly halved the price target to $40 from $75.
Finish Line is in a weaker position, according to UBS analysts, who also downgraded it to sell from neutral. Its price target was cut to $9 from $14.
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“We think Finish Line faces all the structural risks that Foot Locker does, with incremental risk of a more rapid deterioration in its core mid/lower-tier markets versus Foot Locker,” the note said.
UBS says Finish Line has the most geographic overlap with J.C. Penney Inc. JCP, -1.25% and Sears Holding Corp. SHLD, +0.32% stores, which are “a proxy for B&C malls” and are “particularly challenged.”
Susquehanna also turned its attention to the troubles at Hibbett Sports Inc. HIBB, +4.13% , cutting its price target to $11 from $15. The company is making the right decisions, according to analysts led by Sam Poser, but they don’t know about the timing for a turnaround.
Susquehanna rates Hibbett shares neutral.
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“The question we ask is how successful will Hibbett’s marketing and merchants teams be, in partnership with key vendors, in telling compelling stores, buttressed by compelling product in order to drive material improvement in same-store sales?” analysts wrote.
Foot Locker shares were the leading decliner around Monday midday trading, down nearly 6%, with Nike, Under Armour Inc. and Dick’s Sporting Goods Inc. DKS, -1.17% Finish Line is down 8% while Hibbett shares are up 4.4% in Monday trading.
Nike shares are up 5.6% for the year so far, Foot Locker shares are down 54.3% for the period, and Finish Line is down 46.2% for 2017 to date. The SPDR S&P Retail ETF XRT, -0.37% is down 13.6% for the year so far, and the S&P 500 index SPX, +0.07% is up 8.6% for the period.