Nike Stock Has Had a Tough Run. The Case for Buying Now.
If the stock market were a race, Nike would be near the back of the pack. Don’t expect it to stay there much longer.
Nike stock (ticker: NKE) has fallen 8.2% in 2023, putting it in the bottom quintile of all S&P 500 stocks this year. Its list of ailments runs long: There’s too much inventory; not enough demand; a sluggish economy in China, its second-largest market; and competition from upstarts like On and Hoka. Nike has also laid out big targets—targets that look increasingly out of reach—and trades at a premium valuation multiple, one that looks too high, given the aforementioned issues.
But like a runner who leaves enough for a big kick at the finish, Nike stock might be ready for a big push higher. Most of its problems—from high Covid-era shipping and raw-materials costs and too many shoes that no one wants to buy—are fading, while the focus has returned to innovation. As markdowns in the U.S. slow and China begins to recover, Nike’s rate of sales growth should start to accelerate and margins should improve. Investors would be wise to buy now in anticipation of that happening—or risk missing the move.
“Our view is that as soon as the market starts to sense [the] sales growth rate and margin improvement, the stock will start moving higher,” writes UBS analyst Jay Sole. “This could happen when Nike reports...earnings in late September or even sooner.”
Nike may be down, but it isn’t out. Its Jordan-branded sneakers and apparel, for example, raked in sales of about $6.6 billion for the 12 months ended in May, more than triple the $2.1 billion in expected sales this year for On. Anecdotally, people still love and trust the Nike brand and turn to it when considering a new pair of shoes.
“My go-to shoes and the brand [I] trust the most, for me it’s Nike,” says Payum Payman, a 39-year-old senior vice president at Citi Private Bank, who grew up playing tennis in Nike sneakers.
It has taken a while, but inventory has started to decline, and markdowns should get less onerous. Inventories fell to $8.5 billion in the second quarter of calendar-year 2023 from $8.9 billion in the first quarter of the year. Chief Financial Officer Matthew Friend said on Nike’s second-quarter earnings call that the company expects to see a “modest improvement in markdowns versus the prior year” in the second half of the year.
Nike’s big challenge is getting its “direct to consumer” channel to work the way it has envisioned, cutting out the middleman at places like Foot Locker (FL) and reaching shoppers online, through its website or app, and at Nike stores. That allows the company to keep the entire sale price, earning it a higher margin. Nike said on its most recent earnings call that it expects DTC sales to get to about 60% of total sales “long term,” from about 45% in its most recent quarter.
Worries about that strategy have cropped up recently, as Nike announced that it would start selling at Macy’s (M) once again—a sign, perhaps, that the DTC strategy isn’t going as well as it should. But Nike isn’t all that far away from meeting its goals. Its current-quarter sales guidance calls for a mid-single digit sales increase, and takes into account mild product markdowns and a stronger dollar. “Their DTC business is much better developed than most others,” says Oppenheimer analyst Brian Nagel, who has a $150 price target on the shares, reflecting a 40% upside from their recent $107.51. “Behind all this noise, the Nike model is frankly in great shape.”
If that’s the case, Nike should get more profitable. That’s what it predicted in 2021, when it said margins on earnings before interest and taxes would reach the high teens by 2025. Instead, Nike’s margins were 11.5% in fiscal-year 2023 and are expected to hit 12.3% in the current fiscal year.
UBS’ Sole, though, argues that Nike is much closer to its target than it appears. Strip out the higher shipping costs, the surging input prices, and the impact of inventories, and then account for the growth in Nike’s online business, and margins could get a 6.5-percentage-point boost, to about 18%. “While macro dynamics have impacted margins near term and macro could further delay the timing...the company still feels the targets are achievable,” he writes.
China is the wild card. Although Chinese consumer spending remains a question mark, the People’s Bank of China has recently cut several key lending rates that should help boost the economy. Longer term, middle-to-upper-income households in the country could grow at about 11% annually through 2025, to 209 million, according to a McKinsey report. That would drive more purchases of premium brands, including Nike. Indeed, Wall Street analysts model 13% annual sales growth in China through the next couple of years, to $9.9 billion, according to FactSet. That would help total sales get to about $65.7 billion by 2026 from an expected $52.3 billion this year.
All told, Nike could earn $5.50 a share in 2026, up 16% annually from 2023’s expected $3.52. Growth will need to take the stock higher. The stock probably won’t get much cheaper, but it might not get more expensive, either.
Jefferies analyst Randal Konik expects the DTC business to drive growth. That would go a long way toward convincing the market that Nike’s brand remains powerful—and drive upside. Konik has a $140 price target on Nike’s stock, reflecting a 30% upside for the shares.
For investors still wondering whether to buy the stock, there’s a simple answer: Just do it.