Can Nike Stock Nearly Double To Pre-Inflation Shock Highs Of Over $175?

[Note: Nike fiscal year ends in May]

Nike’s stock (NYSE: NKE), a company designing, developing, and marketing footwear, apparel, equipment, and accessory products, currently trades at $94 per share, around 47% below its level of $176 seen on November 7, 2021 (pre-inflation shock high), and has the potential for gains. The athleisure giant is grappling with supply chain constraints and a slower-than-expected recovery in China. Being a discretionary company, the company faces headwinds given the harsh macro environment. For the first nine months of fiscal 2024, Nike’s revenue grew only 1% year-over-year (y-o-y) to nearly $39 billion, but its earnings per share rose a solid 7% y-o-y to $2.74. Inventories for Nike were $7.7 billion, down 13% compared to the prior year in the recent Q3. A steady flow of innovative footwear releases and a drop in inventory levels pushed for higher profit margins in FY 2024 so far. Nike’s gross margin landed at 44.5%, up 100 basis points y-o-y in the first three quarters of 2024.

Nike’s stock is down almost 13% year-to-date. In comparison, Nike’s peer Lululemon’s (NASDAQ: LULU) stock is down 40% since the beginning of this year. Looking ahead, Nike’s management only expects 1% full-year revenue growth in FY 2024. Over the next three years, Nike plans to reduce its expenses by $2 billion, which could enable its operating profit margin to reach the levels seen during the pandemic of over 15% (compared to the current ~13%).

NKE stock has suffered a sharp decline of 30% from levels of $140 in early January 2021 to around $94 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. Notably, NKE stock has underperformed the broader market in each of the last 3 years. Returns for the stock were 18% in 2021, -30% in 2022, and -7% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that NKE underperformed the S&P in 2021, 2022, and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and TM, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could NKE face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

Returning to the pre-inflation shock level means that NKE will have to gain about 88% from here. While it has the potential to recover to those levels eventually, we estimate NKE’s Valuation to be around $101 per share, almost 7% higher than the current market price. Our detailed analysis of NKE’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to a high demand for goods; producers were unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, and it is prepared for rate cuts in 2024.

In contrast, here’s how NKE stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

NKE and S&P 500 Performance During 2007-08 Crisis

NKE stock fell from nearly $15 in October 2007 (pre-crisis peak) to almost $10 in March 2009 (when the markets bottomed out), implying that NKE  stock lost almost 30% of its pre-crisis value. It grew from the 2008 crisis to levels of around $17 in early 2010, rising roughly 59% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of $1,540 in September 2007 to $757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of $1,124.

NKE Fundamentals Over Recent Years

NKE revenues grew 15% from $44.5 billion in FY 2021 to $51.2 billion in FY 2023. During the same period, the company’s EPS fell 9% to 3.30 in FY’23. The reason for this decline was inflation curbing consumer spending and pushing up freight costs for the company. The company’s margins were under pressure because of elevated inventory levels during this period.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe NKE stock has the potential for strong gains once fears of a potential recession are allayed.

It is helpful to see how its peers stack up. NKE Peers shows how Nike’s stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 6/4/2024
[2] Cumulative total returns since the end of 2016