Should You Hold Nike (NKE)?

Year-to-date, footwear companies have been a bright spot in an otherwise languid retail sector.

So, it came as a shock last week when Nike (NKE) reported earnings and issued a warning that sales would decline 10% in the current quarter and in the mid-single digits for the full year.

Shares plunged 20% the following day as financial pros began digging through the earnings report in earnest, according to our TrackStar data.

The stock is down almost 60% from its all-time highs in 2021; levels that haven’t been seen since 2018.

It has led to the all-important question…

Is Nike worth holding?

Nike’s Business

Nike is THE global powerhouse in athletic footwear, apparel, and equipment design, marketing, and distribution. 

Founded in 1964, the company has revolutionized the sports industry with its innovative products and iconic “Just Do It” slogan, inspiring athletes at every level.

Things leveled up in the 1980s when CEO Phil Knight made a sponsorship bet on an up-and-coming basketball player, Michael Jordan.

The company’s product lineup spans a wide range of sports and activities, from running and basketball to soccer and fitness training. 

Nike’s commitment to innovation is evident in its cutting-edge technologies, such as Air, React, and Flyknit, which continually push the boundaries of athletic performance.

The company segments its business into the following areas:

Footwear (65% of total revenues) – Includes athletic shoes for various sports and activities, from running and basketball to soccer and training.

Apparel (27% of total revenues) – Encompasses performance clothing and lifestyle wear for men, women, and children.

Equipment (4% of total revenues) – Consists of sports balls, bags, eyewear, and other athletic accessories.

Converse (4% of total revenues) – A wholly-owned subsidiary that designs, markets, and distributes athletic lifestyle footwear, apparel, and accessories.

Global Brand Divisions (0.1% of total revenues) – Primarily consists of NIKE Brand licensing and other miscellaneous revenues.

In its fiscal 2024 fourth quarter, Nike faced challenges as revenues declined 2% to $12.6 billion. Its online arm, Nike Direct, which accounts for 43.6% of revenues, saw sales drop by 8%.

The company’s performance product segment showed strong growth but was offset by declines in the Lifestyle category. As a result, NIKE has revised its fiscal 2025 outlook, expecting revenue to decrease by mid-single digits due to product cycle transitions and shifting channel dynamics.

Management is actively addressing these challenges by accelerating its innovation pipeline and implementing strategic shifts. 

The company is sharpening its focus on sport, scaling newness and innovation, enhancing storytelling, and elevating its marketplace presence. These efforts aim to reposition Nike for sustainable, profitable, long-term growth despite near-term headwinds.

Financials

Source: Stock Analysis

Nike’s latest growth warnings come after more than a decade of perpetual growth hindered only by the pandemic.

Worryingly, margins haven’t improved as the Nike Direct channel volume increased.

However, the company still generates plenty of free cash flow and carries very little debt, which allows it to pay a nearly 2% dividend and generously repurchase shares.

Valuation

Source: Seeking Alpha

Nike’s current and forward valuations should reflect its dour outlook. Yet, it trades at higher multiples than FootLocker (FL), Wolverine Worldwide (WWW), and Sketchers (SKX).

In fact, only Deckers Outdoors (DECK) is valued higher. But as you’ll see, it’s entirely tied to growth.

Growth

Source: Seeking Alpha

Nike’s revenue growth numbers are anemic. But so are FootLocker’s and Wolverine Worldwide’s. Yet, FootLocker is far more entrenched in brick and mortar than Nike is. And a good chunk of its recent revenue hits came from Nike pulling shoes to sell through its Nike Direct.

Interestingly, Sketchers displays solid growth and forecasts a healthy 2024 to go along with its reasonable valuation.

Profitability

Source: Seeking Alpha

Nike’s profitability sits right in the middle. 

Deckers delivers better margins, Sketchers roughly similar, while Wolverine and Footlocker are barely turning a profit.

Our Opinion 6/10

We aren’t particularly excited about Nike’s prospects here.

Management has no clear plan to rejuvenate sales or improve its profitability.

In an environment where apparel spending is constrained to viral trends, Nike must return to its roots.

We wouldn’t be willing to jump in here even as cheap as shares are.

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