Nike’s Shoe is on the Other Foot

Nike (NKE) had this great idea – sell shoes directly to customers.

E-commerce helped other companies grow profitably. Yet, Nike couldn’t pull it off. While it’s direct revenues grew 18% last quarter, it came at the expense of its wholesale business through retailers like Foot Locker (FL).

In the last two years, the company struggled with high inventory levels, despite record sales.

While financial pros made this their #1 footwear stock search, they may have put the shoe on the wrong foot.

Nike’s Business

Famous for the Air Jordan shoe line, Nike sports and athletic wear and equipment exploded in the ‘90s, becoming one of the most popular brands in the U.S. and globally.

The company breaks its business down into footwear, apparel, and equipment by geography:

Source: Nike Website

As the numbers above show, sales in China lagged the rest of the world, much as the country’s economy did. That’s partly due to Covid, but the company also took a hit because of its stance on Xinjiang cotton.

While there are signs of improvement, it remains uncertain at best.

American consumers have held strong, but worries over a possible recession remain.

Financials

Source: Stock Analysis

Nike’s size and strong global brand help it consistently grow sales in the high single-digits most years.

And overall, they’ve done a great job holding gross margins in place.

However, operating margins fell over the last two years as inventory remained at a whopping $8.4 billion compared to prepandemic levels of around $5.6 billion.

In fact, other than 2021, the company’s inventory has grown larger every single year for the past decade.

Valuation

Source: Stock Analysis

Compared to other footwear companies, Nike is one of the most expensive on a price-to-earnings and price-to-cash flow basis.

Crocs (CROX), for example, is a third of the multiple on both metrics. Sketchers (SKX) also looks like a much more compelling valuation.

Growth

Source: Seeking Alpha

Nike’s growth from revenue to EBITDA is also on the lower side compared to most of its peers. Interestingly, its customer Foot Locker (FL), isn’t doing well, partly because it’s no longer getting exclusive access to Nike shoes.

Looking at this list, we’d still put CROX as one of the top stocks given its valuation and growth.

Profitability

Source: Seeking Alpha

Profit-wise, Nike still commands solid margins. But those have declined markedly and are no longer category-leading.

And again, CROX looks to be the best of the bunch here.

Our Opinion 3/10

Nike may be a well-known brand. But it’s struggles don’t appear to be ending anytime soon.

Not only do they need to work off excess inventory, but they also need to reinvigorate sales in China, it’s highest margin region.

While Nike typically trades at a premium, it’s simply too rich for its current performance and outlook.