Nike (NYSE:NKE) shares are still down about 20% from 52-week highs set in January 2020, even after the overall market bounce of the past few days raised shares 34% from lows set in the past week. Like many other retailers, the shoe and clothing manufacturer and seller is facing headwinds related to efforts to stem the coronavirus pandemic.
The company is taking steps to address the issues and working to come out stronger on the other side of this situation, and it has $2.8 billion in cash to help it survive in the meantime. During the company's third-quarter earnings report conference call on Tuesday, President and CEO John Donahoe said: "We know it's times like these that strong brands get even stronger. And I truly believe no one's better equipped than Nike to navigate the current climate."
Let's look at three reasons why this short-term downturn could be an opportunity for long-term investors interested in the stock.
1. Early lessons learned from the coronavirus outbreak
Before the outbreak, the company's products were selling exceptionally well in China, with several quarters of double-digit growth. Even in its most recent quarter, sales were trending up double digits until the outbreak halted the momentum.
Because of the pandemic, the company initially closed all its stores in China, then South Korea and Japan. Now 80% of its 5,000-plus stores in China are back up and running, with the company reporting strong customer demand and traffic.
Importantly, the company said it had learned lessons on responding effectively to the outbreak in China, it is now applying those lessons in Japan and South Korea, and it is seeing early momentum in those markets. The strategies will most certainly be useful, as now most of its stores outside of China, South Korea, and Japan are all temporarily closed.
2. On the right side of the health movement
Before the coronavirus outbreak, healthful living was gaining traction around the world. Now, in the aftermath of the crisis, I would not be surprised to see this trend accelerate. Nike will benefit because its entire business encourages an active lifestyle.
One would imagine that after weeks of staying at home, people around the world will flock to workout centers like it's a new year's resolution times 10. The surge in exercising around the world should give a boost to demand for Nike products.
Admittedly, there will be a drop-off from the initial increase, but the level of activity will likely remain at elevated levels and grow from there.
3. Incredible growth in digital sales
In closing retail stores around the world, Nike pushed customers to order online. In its third-quarter conference call, CFO Andy Campion said: "Nike Digital demand has been extraordinary, with Nike Digital Commerce sales over the past few days approaching Holiday peak levels growing triple digits."
In its most recent quarter, digital sales increased 36% over the same period a year ago. Furthermore, the company's recently released Nike App in China accumulated five million downloads and digital sales grew triple digits in the country.
The strong online sales demonstrate resilience in demand for Nike products, which is a great sign for shareholders.
What this means for investors
The company saw an opportune time to buy back its stock in the most recent quarter, spending $957 million on repurchases. Nike paid an average price of $100 for each of those shares. It would be reasonable to infer that the company would believe its shares are currently undervalued at roughly $84 a share as of this writing. Moreover, the company has $11 billion remaining on a board-approved buyback program, which means you may see some massive repurchases.
The decrease in stock price allows long-term investors the opportunity to collect shares of this incredible consumer discretionary stock at discount prices. Importantly, since no one knows how long the pandemic will last or how severe its effects will be, a strategy of dollar-cost-averaging would be sensible.