Why Financial Pros Soured on Nike

Apparel companies finally caught a bid in December, with retail stocks outperforming the S&P 500 by nearly 3x in the last 30 days.

Financial pros began looking through the beaten-down names for potential value plays, according to our Trackstar data.

That stopped when Nike (NKE) reported Q1 2024 earnings two weeks ago.

Soft sales projections worried big-money investors.

They weren’t sure if this was a Nike problem or something greater.

After all, retailers haven’t had it easy for the last…well…several years.

While they searched out Nike’s stock more than any other footwear company, our analysis shows this isn’t the time to add this ticker to your portfolio.

Nike’s Business

Named after the Greek goddess of victory, with its well-known swoosh logo, Nike built a brand synonymous with athletic prowess and innovation.

Big bets on athletes like Michael Jordan, Tiger Woods, and many others paid huge dividends under the leadership of founder Phil Knight, who stepped down in 2015.

Nike sponsors athletics around the world, selling its products in over 190 countries on every continent (save Antarctica).

Revenues are broken down both by product line and geography:

Source: Nike Q1 2024 Earnings

The company recently reported its Q1 2024 earnings results, which didn’t go over well.

Supply chain issues have resulted in lower inventory levels and delayed shipments, slightly impacting overall sales. Full-year guidance disappointed and management warned of a ‘highly promotional’ environment. Specifically, Nike forecasted lower sales in key long-term growth drivers (China, Europe, and Digital).

That said, management laid out efforts to reduce overhead, simplify product assortment, and increase automation, ideally driving $2 billon in annual cost savings.

Financials

Source: Stock Analysis

Nike doesn’t grow at the rate it once did, with the U.S. market fully saturated. Nonetheless, it’s done a great job improving sales YoY while most other apparel companies struggle to maintain the same sales levels.

Higher supply chain costs crimped margins, but the bigger problem lies in overhead, which Nike acknowledged.

Operating margins dropped from around 13% to 11%, pushing free-cash-flow margins below 10%.

With an operating income of around $5.7 billion, an extra $2.0 billion in cost savings would greatly improve profitability. That seems like a stretch. While Nike is known for product innovation, it’s unclear if they can streamline and improve operations.

We are a bit concerned the company spent around $7.5 billion in dividends and share repurchases this year and almost $6.0 billion in 2022, given operating cash flow was $5.8 billion and $5.2 billion respectively.

However, Nike had over $10 billion in cash on its balance sheet with total debt of $12.2 billion. So it’s not a bad use of the excess cash.

Valuation

Source: Seeking Alpha

Nike is expensive relative to its peers on a price-to-earnings and price-to-cash basis.

Deckers Outdoors (DECK) is the closest with a P/E non-GAAP multiple of 30x and price-to-cash of 20x.

If those metrics seem lofty, they are. And we’d argue aren’t backed up by the company’s growth.

Growth

Source: Seeking Alpha

Deckers may put up double digit revenue growth. But Nike doesn’t. In fact, Nike’s sales growth is the lowest in every category except for Footlocker (FL).

While Nike’s free-cash-flow growth averages 3% over the last few years, Crocs (CROX) boasts a 96% average growth, while Deckers comes in with a decent 16% annual growth rate.

Profitability

Source: Seeking Alpha

Nike’s margins aren’t that great compared to its peers.

While it beats out Flootlocker and Skechers (SKX) for EBIT margin, it is half what you get from Crocs or Deckers.

While Nike’s free-cash-flow margin isn’t terrible, it’s not great either.

Our Opinion 5/10

While Nike’s brand is well-known worldwide, we question its ability to deliver on its lofty cost-savings goals.

Competition is fierce, with many apparel companies struggling.

We can’t justify an investment in Nike when it’s this expensive and would look elsewhere for better opportunities.

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