Nike (NYSE: NKE) signed sports stars, including basketball icon Michael Jordan, to endorsement deals. And it produced memorable marketing campaigns. This helped boost the company's shoe and apparel popularity throughout the years.

And investors were undoubtedly pleased as its sales and profit soared. But things haven't gone smoothly lately. That's reflected in the stock price performance. Nike's share price has dropped 33% in the last year. That's in sharp contrast to the S&P 500's 19% gain.

Does this represent an attractive buying opportunity? Or should investors avoid the shares, fearing a value trap?

Lack of innovation

Facing several challenges, Nike had a rough year. These likely won't get fixed in the short run, either.

A lack of innovation heads the list. Nike has to keep investing in innovation and produce new products that resonate with customers. But it has fallen behind on that front with a dearth of products. Meanwhile, recent launches didn't resonate strongly with consumers. Unfortunately, this comes as it faces more intense competition. Fierce competitors include Lululemon Athletica and On Holding.

You can see the effects by looking at the top line. In the latest fiscal year, which ended on May 31, Nike's adjusted revenue edged up 1%. This excludes foreign currency translation effects. The tepid top-line growth came as management increased spending on advertising and promotions. These rose 6% last year. Hence, it doesn't seem like Nike got much bang for its buck.

Other issues

Meanwhile, a few years ago, management decided to push online sales and place less emphasis on retail channels. That may have made sense during the early days of the pandemic when shopping in physical stores was severely limited. However, fast forward to a more normal foot traffic, and the strategy didn't have the impact that management hoped. By placing too much emphasis on e-commerce, Nike lost valuable shelf space to rivals, and it may face challenges winning it back.

Additionally, Nike sells its shoes and apparel at premium prices. With high costs for items like food and gas, it's tough for stretched consumers to buy the company's merchandise. While inflation has been abating, there's a risk the Federal Reserve has gone too far. Recent data shows job growth has slowed, and there has been some evidence that consumers have grown more cautious in their spending. Slowing economic growth will present further challenges to Nike.

Management notes it won't fix its problems quickly. It expects the tough times to continue in the latest fiscal year. The company anticipates a mid-single-digit percentage drop in revenue, including a 10% decline in the first quarter.

Clearly, no one likes to see top-line declines. And it's unclear whether things will improve given the potential for stretched consumers to pull back further.

High-flying shares get grounded

The share price's weak performance has translated into a cheaper valuation. Nike's stock has a price-to-earnings (P/E) ratio of 20. That's down from about 36 at the start of the year. The P/E ratio is at its lowest level in more than a decade.

In contrast, the S&P 500 sells at a 28 P/E multiple, up from 25. But that doesn't mean Nike's shares sell at a bargain versus the market and its historical valuation. In fact, I think it's a warning signal. After all, there's a reason the stock has fallen and sells at a lower valuation.

With Nike's long-term challenges, including fierce competition and operational missteps, I'd sell the shares at this point. I would only consider purchasing the shares if you see that Nike has started producing leading products that gain market acceptance, regenerated sales growth, and increased market share.

Until then, I'd look for better investment opportunities.

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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica and Nike. The Motley Fool recommends On Holding and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.

Nike: Buy, Sell, or Hold? was originally published by The Motley Fool