Nike Disappoints, Buy Foot Locker Instead?

Nike (NKE) ran past earnings forecasts, but that wasn’t enough for fickle investors, who have sold down the sportswear stocks shares today.

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Shares of Nike have dropped 1.2% to $77.33 today at 3:19 p.m., even as Under Armour (UA) has risen 1.3% to $87.16 and Skechers U.S.A. (SKX) has gained 1.9% to $33.06. Even Lululemon Athletica (LULU), which has dropped 16% in December, has ticked up today–it’s gained 0.1% to $58.83.

Marketwatch has the details on Nike’s earnings:

Nike's fiscal second-quarter profit rose to $537 million, or 59 cents a share, from $384 million, or 42 cents, a year earlier, when discontinued operations hurt results by 15 cents a share. Sales in the quarter ended Nov. 30 rose to $6.43 billion from $5.96 billion.

Analysts, on average, were looking for profit of 58 cents a share on sales of $6.44 billion, according to FactSet…

Nike's North American sales rose 9%, missing estimates of analysts many of whom were expecting a gain of at least 10%. Western Europe sales rose 15% while China turned positive with a gain of 5% excluding currency translations.

Canaccord Genuity’s Camilo Lyon and Patrick O’Brien fear the worst is ahead:

In our opinion, this was a fine quarter with no surprises; however, as we expected expenses are accelerating resulting in guidance that implies a meaningful reduction to Q3 and Q4 estimates. Also, gross margin headwinds are mounting as the favorability from raw materials has turned and supply chain disruptions in Mexico will persist for two Q's. Given NKE's premium 25x multiple, we prefer to play its strength through its retail partners ([Foot Locker (FL) and Finish Line (FINL)]).

Susquehanna Financial Group’s Christopher Svezia also recommends investors buy Foot Locker instead of Nike. He writes:

Nike shares trade at 14.8x FY15 EV/EBITDA (SIG), a +46% premium to its five-year average. As expected, current expectations are leaving little room for error. That said, we believe Nike’s momentum bodes well for FL. Nike represents ~65% of FL's sales and is weighted by basketball. In addition, futures strength in North America and Western Europe (Germany, in particular), point to continued momentum in these regions. Recall that Germany represents FL's largest country since the RSG acquisition. At 5.8x NFY EV/ EBITDA, FL shares continue to look relatively attractive complemented by a +2% dividend yield and ~$4.40 a share in net cash.

Shares of Foot Locker have gained 3.2% to $40.95 today, while the Finish Line, which beat earnings estimates today, has risen 7% to $27.97.