25% Gains Left For Nike’s Stock?

Note: Nike’s FY’24 ended on May 31, 2024. 

After almost a 33% decline so far this year, at the current price of around $73 per share, we believe Nike stock (NYSE: NKE), a company designing, developing, and marketing footwear, apparel, equipment, and accessory products – the company’s stock could likely be pressured in the short term. However, we believe that Nike will get back on track, with rising sales and profits over the long haul. NKE stock has declined from around $109 to $73 year-to-date, underperforming the broader indices, with the S&P growing about 13% over the same period. In comparison, NKE’s peer Lululemon stock (NASDAQ: LULU) fell 50% to $254 so far this year. Nike is struggling with macro pressures, uneven consumer trends, sluggish brick-and-mortar sales in China, a weak wholesale order book, and softer digital sales. Nike stock is now down nearly 60% from all-time highs in November 2021. A fall of 60% or more has only occurred twice since going public in 1980, and this hasn’t happened in the last 20 years. The footwear giant’s shares currently trade at a price-to-earnings ratio of just below 20. Nike’s valuation is the lowest in a decade, reflecting the pessimism surrounding the company. There is a possibility that even small improvements could boost the stock price.

We forecast Nike’s Revenues to be $49.1 billion for the fiscal year 2025, down 4% y-o-y. We forecast earnings per share (EPS)  to come in at $3.12. Given the changes to our revenues and EPS forecast, we have revised our Nike’s Valuation to $91 per share, based on a $3.12 expected EPS and a 29.3x P/E multiple for the fiscal year 2025 – almost 25% higher than the current market price. The company’s stock appears very cheap at the moment.

NKE stock has suffered a sharp decline of 50% from levels of $140 in early January 2021 to around $73 now, vs. an increase of about 50% 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 HD, 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?

What Could Work For Nike?

• Turnaround plans – Nike’s revenue rose by less than 1% in its fiscal 2024. The company’s top-line weakness might have forced management’s hand at initiating a multi-year plan to cut costs by $2 billion. These plans include the cancellation of certain underperforming product lines and laying off hundreds of people as part of an effort to cut expenses. Nike is in a transitional period focused on streamlining the sluggish sales of many of its brands. The company expects its revenue to drop for fiscal 2025, with a 10% drop coming in the first quarter.
• Growing profitability – Nike’s revenue isn’t growing as much as expected, but the company’s profitability is strong (which allows it to return cash to shareholders) and it has a huge competitive advantage due to its brand and the demand it has been able to build. The company’s earnings per share grew 15% y-o-y to $3.73 in FY 2024.
• Rising margins – Nike’s margins have stayed within a tight range for a long time due to its mature nature of business. However, Its gross margin rose 110 basis points to 44.6% in fiscal 2024. A combination of lower freight costs and higher prices for some premium products drove this expansion. The company expects those tailwinds to boost its gross margin by 10 to 30 basis points in FY 2025. In other words, Nike still has a lot of pricing power and can offset promotional sales of low-margin products by selling higher-margin premium products in the long run. It should be noted that Nike’s rival Lululemon still reports much higher gross margins of ~58% (FY 2024 ended Dec 31).
• Better inventory position – From a financial standpoint, Nike’s 2024 inventories were down 11% to $7.5 billion compared to the prior year with continued improvement in days in inventory. Freeing up inventory means the company can plan to innovate and bring in new products.
• Share repurchases – Nike stock upside could likely also come from share repurchases and dividends. Over the last five years, share repurchases have helped boost EPS by nearly 40%, and management has increased the dividend by about 70%.
• Strong balance sheet – The company generates over $51 billion in annual sales and over $6 billion in free cash flow. With this cash flow, it can easily outspend the competition for sponsorships while still having over $11.5 billion in cash. In addition, Nike’s debt is only 1.3 times EBITDA, ensuring the business is financially protected in case of unexpected difficulties.

It is helpful to see how its peers stack up. Check out how Nike’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 7/29/2024
[2] Cumulative total returns since the end of 2016