Nike Has Been a Loser. Why Its Stock Can Just Do It.Shares of the athletic shoemaker have fallen, but the arrival of the Olympics could signal that a turnaround is set to begin.
By
Teresa Rivas
June 21, 2024 12:01 am ET
STEPHANIE KEITH/GETTY IMAGES
It feels like a golden age for athletic wear. So why is Nike struggling so badly?
Nike investors aren’t used to watching the stock take this kind of beating. Shares have tumbled 12% this year—and it isn’t hard to see why. China’s uneven economy has meant slower sales, while the high cost of living has also weighed on consumers elsewhere. Nike’s long innovation cycle resulted in inventory problems and created an opening for competitors like Hoka maker Deckers Outdoor and On Holding , which have both climbed roughly 50% this year.
It’s a lot of bad news, but much of it is already baked into the stock, with shares trading at a 25% discount to their historical average. What’s more, Nike appears to have new shoes coming that could excite shoppers again, while the Summer Olympics, set to start in late July, should be another catalyst for the stock. Add it up, and the tough times for Nike, which is due to report earnings on June 27, should be coming to an end.
“It takes time for a comeback of this scale, but it’s clear Nike is focused on the right things,” says Maria Lernerman, a portfolio manager at Harding Loevner. “I don’t see it as a question of if, but of when, performance will improve.”
The Nike turnaround starts with the Olympics. Although Nike has gotten some blowback from the uniforms it designed for some female athletes, the Summer Games are still a likely catalyst for its shares. Given the company’s sport-first approach, it’s a time for some of its star athletes to shine. It’s also outfitting the American break-dancing team with a new, specially designed shoe as the sport makes its Olympic debut.
The Games coincide with what’s likely to be a fresh wave of new Nike products. The company hasn’t been sitting idle as brands like Hoka and On push the boundaries of athletic footwear, but R&D takes time. Now it’s likely on the cusp of a new wave of sneakers that could reignite interest in the brand. During earnings calls in May, Foot Locker and Dick’s Sporting Goods , key retail partners for Nike, highlighted the company’s recent innovation as a potential for future sales. This spring, the company’s innovation summit in Paris highlighted some of its coming products, like new iterations of its Nike Air franchise.
“We have seen Nike in this spot twice before over the past 10 years, and when they really focus on new innovation, it has translated to great results over the following years,” Edward Jones analyst Brian Yarbrough told Barron’s in an email.
Just don’t expect Nike to report great results when it releases its financials. Recent quarters have been disappointing. Downbeat guidance sent the shares tumbling after its most recent earnings report in March, a repeat of what happened in December, when Nike had its worst day in years after its sales forecast disappointed. The company is expected to report a fiscal fourth-quarter profit of 84 cents a share, up from 66 cents from the same period a year ago, on sales of $12.9 billion, up a tick from $12.8 billion. Those numbers matter less than its fiscal 2025 outlook. A positive change in tone could do a world of good for the shares.
“We don’t expect green shoots to translate into sales growth in the first half of fiscal 2025, but building evidence of Nike’s innovation pipeline would bolster confidence in a second-half turnaround,” notes BofA Securities analyst Lorraine Hutchinson, reiterating a Buy rating on the stock.
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Of course, there’s no guarantee that Nike’s newest products will hit the mark, especially given how new entrants have started to grow a loyal consumer base. Likewise, ongoing pressure on the consumer means that the company’s coming results could be another quarter plagued with a conservative forecast.
Reflecting that, Truist Securities analyst Joseph Civello kept the stock at Hold with a $99 price target, citing his belief that management’s tone won’t change.
Still, Nike seems like a bet worth making. Right now, the stock trades for 24 times forward earnings. That’s higher than the S&P 500’s 21.7 times but well below Nike’s five-year average of 31.5. Stifel analyst Jim Duffy admits that the shares won’t be able to expand their multiple again “until inflection to growth and resulting operating leverage becomes more tangible.” That said, he still argues that the stock—which he believes should trade to $117, up more than 20% from Thursday’s close of $95.57—is “worth a premium,” given its market-leading position and the opportunity for the brand to rebound.
When it comes to Nike stock, just do it.
Write to Teresa Rivas at teresa.rivas@barrons.com |
