(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Shares of Nike Inc. (NKE) and Under Armour Inc. (UAA, UA) took it on the chin on Friday, after Foot Locker Inc. (FL) reported disappointing second-quarter earnings and same-store sales that missed analyst expectations. The Foot Locker news puts additional pressure on three stocks that are already struggling in 2017 and are underperforming the broader S&P 500 index.

FL Chart

FL data by YCharts

What Is Going Wrong?

For Nike and Under Armour, rival Foot Locker's disappointing financial results confirm what we have been writing about for some time. Both Nike and Under Armour are experiencing a great slowdown. Friday's news from Foot Locker seems to confirm this may be bigger than just a company-specific issue. But is it a sector issue or is there another company taking away market share?

Even Lululemon Athletica Inc. (LULU) has come under pressure in 2017, with its shares falling by around 10 percent on the year. (See also: Under Armour Stock Price Not Likely to Double.)

FL Revenue (Quarterly YoY Growth) Chart

FL Revenue (Quarterly YoY Growth) data by YCharts

Looking For Growth

Revenue growth in shares of Nike, Under Armour, and Lululemon have been falling going back to the start of 2016, and that should be a primary concern for investors. The slowdown is a key reason why the shares have come under pressure, and is a key reason why Nike recently partnered with Amazon.com to start selling its products. (See also: Why Nike Finally Turned to Amazon for Growth.)

The New Entrants

It is hard to say that the slowdown is because of a migration to consumers no longer shopping in brick and mortar stores and moving to the internet. Nike, Under Armour, and Lululemon would likely not have seen such sharp declines in revenue as well since you can shop directly on their websites.

But two companies that haven't seen this same slowdown – and have actually seen a pickup in revenue growth – are Puma SE (PMMAF) and Adidas AG (ADDYY). Both companies' revenue growth rates have surged. 


FL Revenue (Quarterly YoY Growth) Chart

FL Revenue (Quarterly YoY Growth) data by YCharts

Revenue for both Adidas and Puma has been surging since June 2015, right before Under Armour, Nike, and Lululemon's revenue growth rates started dropping. Puma and Adidas are benefiting where others are falling. Shares of Puma and Adidas have been rising as well in 2017, with their American Depository Receipts (ADR) up about 60 percent and 40 percent, respectively. 

The biggest problem facing Nike, Lululemon, and Under Armour at the moment is that consumers are shifting away from their products. The problem is even bigger than an economic slowdown in consumer spending because these companies now have to win customers back, which is a much harder challenge. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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