The End of an Empire

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Inflation eats away at consumers’ purchasing power. 

Recession forces families to cut back on discretionary spending. 

That’s not a good recipe for the world’s largest footwear brand. Nearly every analyst slapped a sell rating on Nike (NKE).

But that hasn’t stopped financial pros from making the company their top athletic footwear and apparel stock search over the last month.

Once thought immune to the supply chain issues plaguing competitors, Nike now has a real problem getting merchandise to its stores at a reasonable cost.

With shares down 47% YTD, let’s take another look at the company that created the Air Jordan. 

Nike’s Business

Nike is the world’s leading designer, marketer, and distributor of authentic athletic footwear, apparel, equipment, and accessories for a wide variety of sports and fitness activities. 

The firm generates a majority of its revenues from footwear sales, and approximately 25% from apparel. 

Its biggest market is North America, where it made $5.5 billion last quarter, followed by Europe, the Middle East, and Africa, which together contributed $3.3 billion in revenue. 

For years, Nike had stars like Michael Jordan, Tiger Woods, Lebron James, and Cristiano Ronaldo to help drive sales. 

But most of its high-profile sponsors are near the end of their careers. 

Moreover, designer luxury footwear has been taking away market share. 

With a recession now almost certain, things could get even tougher for Nike. 

Valuation

Over the last few years, Nike has focused more on its direct-to-consumer business, building its website to drive more sales. 

The firm has had modest revenue growth over the last five years, rising 35% from $34.3 billion to $46.7 billion. Growth did halt in 2020 but picked back up, and the firm is on pace to have its best year ever, as its 12-month trailing revenues are currently $47.1 billion. 

During Q1 this year, it did $12.7 billion in revenues, an increase of 4% compared to Q1 2021. 

The company has strong financials. It pays investors an annual dividend of $1.22 per share. 

Plus, it has $11.8 billion in total cash and $12.5 billion in total debt, a current ratio of 2.6x. 

Valuation  

NKE has a P/E GAAP ratio of 24.6x, notably lower than its five-year average of 47.6x. 

With shares down 47% YTD, its price-to-earnings ratio is now lower than Lululemon Athletica (LULU)’s 33.9x, but still higher than Adidas AG (ADDYY)’s 16.5x, Under Armour (UAA)’s 9x, and Deckers Outdoor (DECK)’s 20.3x. 

Nike’s price-to-sales ratio of 2.9x is better than only LULU’s 5.2x. Meanwhile, DECK’s is 2.7x, UAA’s is at 0.57x, and ADDYY’s is 1.07x. 

Profitability  

NKE’s gross profit margin of 45.3% is the lowest among these competitors. 

However, it’s worth noting that NKE is more than 3x the size of its closest competitor, LULU. LULU boasts a gross profit margin of 56.5%. 

NKE’s net income margin of 11.96% is betterthan ADDYY’s and UAA’s. But again, LULU performs better, with a net income margin of 15.6%. 

And Nike’s EBITDA margin of 15% doesn’t come close to LULU’s 25.1%. But it does beat out ADDYY’s 9.9%. 

NKE is right up there with LULU in return on equity. And it generates $4.4 billion from its operations, far more than these competitors. 

Growth

NKE has struggled to grow its revenues. It’s at 2% YoY, whereas LULU is at 27.8%. Even worse, its YoY EBITDA growth of -15% is nowhere close to LULU’s 28.5%. 

Our Opinion 2/10

For years, Nike was able to lean on its celebrity endorsements. Many of these star athletes are now past their prime and reaching retirement. 

Today’s youth has embraced luxury footwear like Gucci, Dior, Louis Vuitton, Off-White, Yeezy, and Balenciaga. 

Moreover, with all signs the economy is weakening, Nike has excess inventory in the U.S. that it needs to unload.   

It’s a tough time for Nike and its shareholders. While Nike remains a great American brand, you don’t have to rush in and buy the stock now, as the company faces many challenges ahead. 

More importantly, LULU looks better across the board.