Goldman Sachs just signaled a terrifying turning point for Nike (NKE)

  • Goldman Sachs investment services downgraded Nike to a neutral rating.
  • The bank cited "fundamental challenges" and an excess of inventory in its note to investors.
  • The bad news for Nike indicates the company has not managed to turn around its business yet.

Nike is still facing headwinds as it seeks to right the ship.

Citing "fundamental challenges" in the industry, slowing sales, and an excess of inventory with retail partners, Goldman Sachs downgraded Nike to a "neutral rating" in a note to investors.

Nike has talked openly about its recent difficulties, which saw sales decline in the mid-single digits in the last two quarters. It says that it is now working through its inventory glut, and has a new pipeline of innovations to lure in customers.

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UNITED STATES - APRIL 29: David Solomon, managing director and co-head of the investment banking division of Goldman, Sachs & Co., speaks during the Milken Institute Global Conference 2009 in Los Angeles, California, U.S., on Wednesday, April 29, 2009. This year's conference focused on the global financial downturn. (Photo by Jamie Rector/Bloomberg via Getty Images)
David Solomon, managing director and co-head of investment banking at Goldman Sachs Group Inc., speaks during the 2010 Milken Institute Global Conference in Los Angeles, California, U.S., on Wednesday, April 28, 2010. This year's conference is titled 'Shaping the Future.' Photographer: Jonathan Alcorn/Bloomberg via Getty Images
David Solomon, partner and co-head of Investment Banking at Goldman Sachs & Co., speaks during a Bloomberg Television interview at the annual Milken Institute Global Conference in Beverly Hills, California, U.S., on Tuesday, May 3, 2016. The conference gathers attendees to explore solutions to today's most pressing challenges in financial markets, industry sectors, health, government and education. Photographer: Patrick T. Fallon/Bloomberg via Getty Images
David Solomon, president and co-chief operating officer of Goldman Sachs & Co., poses for a photograph following a Bloomberg Television interview at the World Economic Forum (WEF) in Davos, Switzerland, on Thursday, Jan. 19, 2017. World leaders, influential executives, bankers and policy makers attend the 47th annual meeting of the World Economic Forum in Davos from Jan. 17 - 20. Photographer: Simon Dawson/Bloomberg via Getty Images
David Solomon, president and co-chief operating officer of Goldman Sachs & Co., speaks during a Bloomberg Television interview at the Goldman Sachs Technology and Internet Conference in San Francisco, California, U.S., on Wednesday, Feb. 15, 2017. Solomon discussed sentiment in Silicon Valley and financial regulation. Photographer: David Paul Morris/Bloomberg via Getty Images
David Solomon, president and co-chief operating officer of Goldman Sachs & Co., speaks during a Bloomberg Television interview at the Goldman Sachs Technology and Internet Conference in San Francisco, California, U.S., on Wednesday, Feb. 15, 2017. Solomon discussed sentiment in Silicon Valley and financial regulation. Photographer: David Paul Morris/Bloomberg via Getty Images
David Solomon, co-president and co-chief operating officer of Goldman Sachs & Co., speaks during a Bloomberg Television interview at the Milken Institute Global Conference in Beverly Hills, California, U.S., on Monday, May 1, 2017. The conference is a unique setting that convenes individuals with the capital, power and influence to move the world forward meet face-to-face with those whose expertise and creativity are reinventing industry, philanthropy and media. Photographer: Patrick T. Fallon/Bloomberg via Getty Images
David Solomon, Managing Director and Co-Head of the Investment Banking Division, Goldman Sachs, participates in the Corporate Debt Financing and Economic Recovery panel at the 2010 Milken Institute Global Conference in Beverly Hills, California April 28, 2010. REUTERS/Danny Moloshok (UNITED STATES - Tags: BUSINESS)
David M. Solomon, President and Co-Chief Operating Officer of Goldman Sachs, speaks during the Milken Institute Global Conference in Beverly Hills, California, U.S., May 1, 2017. REUTERS/Lucy Nicholson
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The inventory glut is causing a promotional environment for Nike, which lessens the brand's ability to go sell at full price. A rare event last week — a Nike flash sale — seems to confirm this trend.

Nike has talked a lot about its new digital sales initiatives and direct to consumer strategy, but Goldman says the shift online is hurting Nike's sales — at least for now. 

"The pain from declining brick and mortar has outweighed the benefit of online growth," the note reads.

Goldman also sees pressure from a resurgent Adidas, which has been taking increasing market share from Nike over the year.

Nike is also seeing softening demand overseas, according to Goldman, adding to its woes. China, previously a driver of growth in the region, is especially looking weaker. This should worry investors, Goldman says, as half of all of Nike's revenue growth in the last decade came from overseas regions.

Still, Goldman notes that these negatives are offset somewhat by positives, like the NBA sponsorship. Goldman also says "the underpinnings of [Nike's] business remain compelling," and puts it in a good position to increase its share of the market going forward.

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