Nike(NYSE: NKE) was often considered a safe blue-chip stock for long-term investors. It's the world's largest footwear company by annual revenue, it has plenty of brand recognition and pricing power, and it's worn by many popular athletes.
But over the past 12 months, Nike's stock fell nearly 20% and trades more than 50% below its all-time high in November 2021. Let's see why the bulls shunned this iconic footwear stock and if it can bounce back over the next year.
Image source: Getty Images.
Its troubles started nearly a decade ago
Back in 2015, Nike set a goal of generating $50 billion in revenue in fiscal 2020 (which ended in May 2020). That would have represent a compound annual growth rate (CAGR) of 10% from its $30.6 billion in revenue in fiscal 2025.
The company aimed to expand its Nike Direct channel (which houses its e-commerce website and brick-and-mortar stores) and its international business. Nike also expected sales in China to soar and offset the slower growth in more mature markets.
But in reality, Nike's revenue only grew at a CAGR of 4% to $37.4 billion in fiscal 2020. The softness of its Converse brand and its sluggish sales in North America and Europe offset the resilience of its namesake brand and its growth in China. Its growth was further throttled by the bankruptcy of retailer Sports Authority in 2016, which flooded the market with excess inventory, and the onset of the COVID-19 pandemic in the second half of fiscal 2020.
Nike disappointed investors by missing its $50 billion goal, but the company bounced back quickly from the pandemic as its revenue rose 19% in fiscal 2021, 5% in fiscal 2022, and 10% in fiscal 2023. That recovery was largely driven by the expansion of Nike Direct, which grew its share of Nike's top line from 37% in fiscal 2021 to 42% in fiscal 2023.
What happened over the past year?
Nike Direct's expansion was aimed at curbing its dependence on wholesalers, giving the company tighter control over pricing and gross margins, collecting more customer data to shape its sales strategies, and building its brand awareness.
But that strategy was a double-edged sword because it increased operating expenses and ceded wholesale channels to other footwear makers. Over the past year, Nike Direct's growth cooled as macro headwinds curbed the market's appetite for its lower-end products. The company couldn't offset that slowdown with its shrinking wholesale channel, and sales growth flattened in constant currency terms.
Metric | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 |
|---|---|---|---|---|---|
Nike Direct Revenue Growth (YOY) | 18% | 2% | 4% | 0% | (7%) |
Total Revenue Growth (YOY) | 8% | 6% | (1%) | 0% | 0% |
Data source: Nike. Currency neutral basis. YOY = Year-over-year.
Nike's North American sales declined in fiscal 2024, and that slowdown completely offset its growth in China and other overseas markets. Nike's revenue stayed nearly flat on a reported basis in fiscal 2024, and it expects that slowdown to deepen with a mid-single digit decline in fiscal 2025. Analysts expect the company's revenue to drop 5%.
Nike's gross margin rose 110 basis points to 44.6% in fiscal 2024 as it hiked prices of premium products and benefited from lower freight and logistics costs. Earnings per share (EPS) also increased 15% for the year, but analysts are bracing for a 21% decline in fiscal 2025 as sales growth evaporates.
Where will Nike's stock be in a year?
Nike CEO John Donahoe expects fiscal 2025 to be a "transition year" as the company kicks off a "multiyear innovation cycle," invests in more "consumer-facing activities", and rebuilds relationships with wholesale retailers to help grow its long-term sales.
But those plans don't really address the intense competition Nike still faces from other established footwear makers like Adidas, nimble newcomers like On Holding, and the athleisure leader Lululemon -- which significantly expanded its footwear business over the past two years. And in China, Nike still needs to stay ahead of formidable domestic challengers like Anta Sports (which owns the Chinese rights to FILA) and Li-Ning.
Nike's outlook for a 10 to 30 basis-point expansion of its gross margin in fiscal 2025 implies the company's pricing power is still intact, but it could eventually be forced to increase markdowns if sales don't stabilize over the next few quarters.
Nike's business won't crumble anytime soon, but the company needs to prove its opaque "transition" strategies can actually stabilize sales and earnings growth. Its stock still doesn't look like a bargain at 26 times forward earnings, and its low forward dividend yield of 1.8% won't limit the downside potential as long as certificates of deposit and Treasury bills are yielding nearly 5%. So for now, I believe Nike's stock could stagnate over the next 12 months and underperform the broader market.
Should you invest $1,000 in Nike right now?
Before you buy stock in Nike, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Nike wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $731,449!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of September 3, 2024
Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica and Nike. The Motley Fool recommends On Holding. The Motley Fool has a disclosure policy.
