Nike Stock Is a Bargain Ahead of Earnings. Don’t Wait for More Shoes to Drop.
Nike’s coming earnings are likely to be as stinky as a pair of sweaty old sneakers and gym shorts—but that could be the end of the bad news for the stock. The good news is that there is hope for a turnaround following the looming return of longtime exec Elliott Hill on Oct. 14, who will succeed the retiring John Donahoe as CEO.
The iconic maker of Air Jordans needs a refresh. The company has struggled mightily in the past few years, losing market share to upstarts such as Deckers Outdoor-owned Hoka, Swiss running shoe maker On Holding, and privately held New Balance. Adidas has also enjoyed a bit of a resurgence this year.
So what’s next for Nike? We’re sticking with our recommendation of it from June even though the stock, at a recent $88, has done the opposite of its signature swoosh this year, tumbling nearly 20%. Wall Street has already given Nike the equivalent of a technical foul call, with shares trading for just under 29 times earnings estimates. Sure, that’s still a premium to the broader market. But it’s below its historical average forward price/earnings ratio of nearly 36. Nike is also valued at a slight discount to Deckers. But Deckers, at a P/E of 30, is well above its average multiple of 23. And On Holding is uber-expensive, trading at almost 50 times earnings estimates.
Analysts are optimistic that Hill can return Nike to its former glory. Evercore ISI’s Michael Binetti conceded in a report after Hill’s rehiring was announced that Hill has a big mess to clean up. He wrote that “this turnaround will be complex…and will take time,” while noting that “Nike is in the middle of a difficult cleanup of popular retro products that got oversaturated and un-special in recent years.” But Binetti added that “retailers are already seeing overwhelming force from the company to get back to growth in the U.S.,” and that this could be a “blueprint to return the rest of the world to growth soon.” Nike has particularly struggled in Europe and China.
Wall Street expects the company’s fiscal-first-quarter results, due out on Oct. 1, to be the trough. Earnings are forecast to plunge 45%, while sales are expected to fall 10% from a year ago in the current quarter. But analysts are predicting smaller declines over the next few quarters and a return to growth a year from now, with revenue expected to be up about 5%. What’s more, sales are forecast to rise in all of its key geographic markets.
Bank of America’s Lorraine Hutchinson also praised the comeback of Hill, saying in a report that Nike needs a leader “with a fresh perspective to lead it through the next strategy and accelerate the focus on product.” She added that the CEO change “bodes well for the effort to rejuvenate innovation, rekindle wholesale relationships, and rebuild sales.”
Under Donahoe, who was formerly the CEO of eBay and software maker ServiceNow, the criticism of the company was that Nike’s innovations were more about how to use technology to sell the sneakers as opposed to making the products actually cool and desirable. “Donahoe’s efforts to prioritize direct selling over product development and retail relationships have seemingly created opportunities for more innovative competitors,” said Morningstar analyst David Swartz in a report.
To quote the old Spike-Lee-as-Mars-Blackmon Nike ads from the late ’80s and early ’90s: “It’s gotta be the shoes.” As long as Hill understands that, Nike’s stock looks like a slam dunk at these levels.