Shares of top apparel company Nike (NYSE:NKE) are down 15% this year. Retailers have been struggling due to an increase in shrink and inflation has been chipping away at consumers' discretionary spending, leading to a drop in demand. In just the past month, Nike's stock has fallen 9%.
The recent downtrend is due to another retailer, Foot Locker (NYSE:FL), posting unimpressive results this month and noting a slowdown as revenue was down by 10%. It's a concerning sign that could suggest Nike's business may also face similar challenges when it next reports earnings. In Nike' most recent earnings report, for the quarter ending May 31, revenue was still decent with the top line growing by 5% to $12.8 billion.
But investors may be looking ahead, expecting for a slow down in growth in future periods. Due to the softness in Nike's share price, it has fallen into oversold territory with a Relative Strength Index (RSI) of just over 26 as of the end of last week. This isn't the first time Nike's stock has been oversold as its RSI has been below 30 multiple times this year.
The problem with Nike is that if its growth rate deteriorates, it'll be difficult to justify its high valuation. Even with the decline in value this month, Nike's stock is trading at more than 30 times its trailing earnings. And demand for the company's high-priced shoes and clothes could come under pressure as consumers look for more ways to trim their budgets.
Nike has a strong brand but investors may want to wait until the company reports earnings for the current quarter to see just how resilient it is, as its share price could continue to fall given the headwinds it and other retailers are facing.
