Nike’s (NKE) Marathon: From Setback to Comeback

Nike (NKE) has returned over 950% in the last twenty years with reinvested dividends compared to 630% for the S&P 500.

Yet, increased competition and fast fashion have made it more difficult for the company which has negative returns over the last one, three, and five year periods.

The latest earnings report brought hope to investors as the company replaced CEO John Donahoe with Elliot Hill, who entered as an intern decades ago.

However, the company withdrew guidance, citing concerns with China and the consumer, sending shares lower.

But investors weren’t deterred, as search volume by financial pros spiked after the announcement, according to our TrackStar data.

Fundamentally, the company is on sound footing.

The question is whether it can return to growth mode.

Nike’s Business

Nike’s iconic swoosh logo adorns the feet and apparel of athletes and everyday consumers in over 170 countries worldwide. 

This Oregon-based sportswear giant has revolutionized athletic footwear and apparel since its founding in 1964, consistently pushing the boundaries of innovation and design.

The company designs, develops, markets, and sells a vast array of athletic footwear, apparel, equipment, and accessories. 

Nike’s product line spans running, basketball, soccer, and training gear, as well as lifestyle products. It caters to professional athletes, sports enthusiasts, and casual wearers alike, maintaining a strong presence in both performance and lifestyle markets.

The business is segmented into the following areas:

• Footwear (68% of total revenues) – Athletic and casual shoes for various sports and everyday wear
• Apparel (26% of total revenues) – Performance and lifestyle clothing for sports and casual use
• Equipment (5% of total revenues) – Sports gear, bags, socks, and other accessories
• Other (1% of total revenues) – Licensing agreements and miscellaneous products

In its most recent quarter ending August 31, 2024, Nike reported a 10% decline in revenues to $11.6 billion. This dip reflects challenges in balancing inventory levels and shifting consumer preferences. 

The company is actively reducing its reliance on classic footwear franchises like Air Force 1 and Air Jordan 1, while ramping up investment in new product innovations and sport-specific marketing campaigns.

Nike’s strategic pivot aims to reignite brand momentum through sports. Recent wins include growth in men’s fitness, global football, and running footwear. 

The company’s running segment, in particular, showed promising signs with positive growth and strong future order books. 

Nike continues to invest heavily in brand storytelling, as evidenced by its dominant presence during the 2024 Paris Olympics.

As the company navigates this transitional period, it faces the task of rebalancing its product portfolio and revitalizing its digital sales channels. The company’s ability to adapt to changing market dynamics while maintaining its position as a leading innovator in sportswear will be crucial in the coming quarters.

Financials

Source: Stock Analysis

While Nike has seen decent growth in the last few years, things have gotten more difficult.

China, its biggest growth market, has seen consumer spending pull back while the post-pandemic boom in the U.S. waned.

That’s led management to suspend guidance as it attempts to reassess where it will land both with the consumer and its initiatives.

Functionally, the company continues to perform well, with margins that are only slightly lower than before the pandemic.

Equally as important, Nike generates nearly $8 billion in cash from operations and a bit more than $7 billion in free cash flow.

This gives them plenty of room to invest where they need while paying out a 1.83% dividend yield as well as repurchase shares for an additional yield of 3.0%.

While the company holds $12.1 billion in total debt, it holds almost as much in cash, giving it a clean balance sheet.

Valuation

Source: Seeking Alpha

Of the footwear companies, Nike trades at a premium to all except Decker Outdoors (DECK).

Yet, it trades around 40% below its 5-year average on nearly every metric, indicating that the business is cheap as is the industry.

Growth

Source: Seeking Alpha

Surprisingly, Nike commands the premium valuation without the sales growth of its peers.

In fact, only Foot Locker (FL) has seen worse sales declines over the past several years, which isn’t surprising given the slow death of brick-and-mortar stores.

Profitability

Source: Seeking Alpha

Nike’s profitability sits right in the middle of the pack, lower than Deckers and Crocs (CROX) but higher than Foot Locker and Sketchers (SKX).

However, Nike produces far more cash from operations than any of the others on this list.

Our Opinion 8/10

While Nike trades at a premium to its competitors, we believe the change in CEO, along with a clear transition plan, promises to reignite sales.

This may take a while, as it also relies on the consumer to begin spending.

Nonetheless, with a decent dividend and share buyback plan, we like Nike for a long-term investment.

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