Nike’s Share Price Plunges to its 52-Week Low: Is the Stock a Compelling Buy?
Nike (NYSE: NKE) is a globally-recognisable brand that many of us are familiar with.
Nike is most renowned for its footwear division, with two other iconic brands under its wing: Converse and Jordan.
Apart from footwear, the company designs and distributes an extensive range of products in the sports and fashion industry, including athletic equipment, and lifestyle apparel.
The athleisure brand has struggled since the start of 2024.
In addition to hitting a 52-week low, the share prices of Nike have hit a historic four-year low.
Share prices have plummeted by 33.7% year to date, placing Nike as the worst-performing company in the Dow Jones Industrial Average (^DJI).
With share prices languishing at their lowest level in years, investors may wonder if the time is right to “Just Do It” (alluding to Nike’s famous tagline) and scoop up shares of the sports footwear company.
Nike’s attempt to re-diversify its business
During the pandemic, Nike outlined a strategy to boost its online commerce.
The company aimed for a 50% revenue mix generated from its online commerce by fiscal year 2025 (ending 31 May 2025).
The digital business, which enjoys higher margins, was supposed to enhance Nike’s overall profitability.
Initially, Nike’s strategy yielded success.
For fiscal year 2021 (FY2021), despite the pandemic’s impact on traditional retail, Nike reported stellar financial results.
Notably, in the fourth quarter of FY2021, Nike’s digital business surged by 147% compared to the fourth quarter of FY2019.
Apart from digital growth, Nike recorded strong margin growth in FY2021, with gross margins increasing by 8.5 percentage points year on year.
This positive news propelled Nike’s share price to an all-time high of over US$160 in 2021.
Committing to this transition, Nike took a bold move and severed ties with several major wholesale retailers in 2021.
Some of these retailers included Urban Outfitters (NASDAQ: URBN), Designer Brands (NYSE: DBI), and Macy’s (NYSE: M).
An overcommitment to online commerce
However, the focus on online commerce eventually backfired.
Post-pandemic, Nike’s online business stagnated.
In the latest quarterly report, the fourth quarter of fiscal year 2024 (4Q FY2024), Nike reported a 10% year on year decline in revenue for its digital business.
Nike Direct, encompassing the online division and Nike’s own retail stores, only accounted for 40.5% of total revenue, suggesting that the 50% target by FY2025 is still far off.
Nike also experienced inventory buildup stemming from supply chain disruptions, culminating in a peak inventory of US$9.7 billion near the end of 2022.
Nike has been addressing its excess inventory by offering discounts over the past year.
Furthermore, Nike has been re-establishing relationships with wholesalers such as Macy’s in June 2023 to bring back Nike products.
With the slowdown in digital sales and increased discounting in traditional retail, Nike’s margins have declined from its peak.
This blunder has displeased many investors and contributed to Nike’s current slump.
Bearish guidance
In Q4 FY2024, Nike reported a slight 1.7% year on year decrease in sales revenue from US$12.8 billion to US$12.6 billion.
Despite this decrease, the company achieved a robust 45.5% year on year profit growth, from US$1 billion to US$1.5 billion, largely due to improved operational efficiency and lower expenses.
Nike has also partially resolved its inventory challenges with an 11% year on year drop in inventory levels.
The company’s full-year sales increased by a modest US$0.2 billion year on year to US$51.4 billion.
This indicates that Nike’s discounting strategies have successfully stimulated demand over the past year.
Despite this positive news, shares of Nike plunged by 25% on the day of its results release.
Two main reasons explain this reaction.
Firstly, sales from Nike Direct were down 8% year on year for the quarter, suggesting that Nike is losing its brand appeal.
Additionally, management provided a pessimistic outlook for the first quarter of fiscal year 2025 (1Q FY2025).
Nike anticipates net revenue to be lower by 10% year on year, attributing this forecast to ongoing challenges in the online segment and weak demand in China.
This was in contrast to an expected 3.2% year on year decline.
For FY2025, Nike now expects revenue to be down in the mid-single-digits level year on year compared with estimates of a slight 1% year-on-year increase.
This disparity between expectations and Nike’s forecast may have fuelled diminishing investor confidence.
The company also foresees continued macroeconomic uncertainty in China contributing to this softer outlook.
A possible investment opportunity
With Nike’s share price currently stuck in a rut, investors may smell a potential bargain.
After all, Nike remains the world’s biggest brand in sports footwear and apparel.
To put it into context, Nike generates twice the revenue of its closest competitor, Adidas (ETR: ADS).
This dominant position enables Nike to secure the most lucrative sponsorships with top-notch athletes worldwide, thereby entrenching its brand presence.
For example, Nike recently outbid Adidas as Germany’s official sponsor, ending Adidas’s 70-year partnership with the team.
Trading at a current price-to-earnings (P/E) ratio of 19.1 times, this is the lowest multiple Nike has been trading for the past five years.
Source: S&P Global Market Intelligence
At a five-year low P/E ratio, Nike’s shares appear to be trading at an attractive discount.
Turning back to innovation
In a recent interview with CNBC, Nike’s CEO, John Donahoe, acknowledged the lack of innovation during the pandemic.
Brands such as Hoka One One and Skechers (NYSE: SKX) are gaining in popularity for their comfort.
In terms of running performance, Nike’s shoes are no longer the favourite. Other brands such as Brooks and Asics have caught up.
Because of this, Nike is turning back to innovation by accelerating its new product releases to compete more effectively in the market.
The release of the Pegasus-41 earlier this year has been well-received by running experts.
Additionally, Nike has expanded its product offering beyond running, launching new models in its lifestyle and basketball division.
The upcoming Paris Olympics will be a perfect opportunity for Nike to showcase its new products.
The company will be unveiling its Air Innovation series in Paris, bringing it into the spotlight to a global audience.
If Nike is able to rekindle its innovative streak as well as implement a successful marketing campaign, the sports footwear giant has a good chance in reversing its current decline.
Get Smart: Execution risks
While Nike’s share price may seem like a bargain, investors are advised to stay cautious.
After all, the famous brand has yet to demonstrate traction in its efforts, which will require a gestation period.
The next few quarters are critical in determining whether Nike’s revitalisation efforts can turn its business around.
The good news is that management has acknowledged its shortcomings and identified the reasons for the poor sales performance.
However, there are still execution risks as it pivots back to utilising wholesalers with plans to restart its innovation engine.
Fortunately, Nike is a reliable dividend payer.
The company has been increasing its dividend payout without fail since 2004., with its most recent quarterly dividend for FY2024 standing at US$0.37 per share.
With a dividend yield of 2.1%, investors who scoop up Nike’s shares now will at least be rewarded with some passive income as they wait with bated breath for the company’s recovery.
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Disclosure: Aw Kai Rui does not own any of the stocks mentioned in this article.
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