Nike (NKE 0.66%) investors have no shortage of worries heading into the key holiday shopping season. Sales trends are slowing in key markets like China and the U.S., inventory is building, and a potential economic slump threatens to amplify these challenges into 2023.
Investors rarely get screaming-buy opportunities when everything looks rosy, though. More often, these stock-buy chances come around during rocky economic times like these.
With that in mind, let's look at whether Nike is a good buy right now.
Mixed results
Nike's most recent earnings report was mixed, to say the least. Revenue was up 10% in Q1 after adjusting for currency exchange rate shifts, which was better than the 6% increase the company logged in the previous full fiscal year. CEO John Donahoe called the performance a "strong start" to fiscal 2023 that reflected Nike's growing digital business, valuable brands, and stepped-up pace of product launches .
But the warning signs were unmistakable. Nike's China business shrank by 13%, and management predicted similarly weak results ahead over the short term. Gross profit margin fell as the company had to cut prices. And inventory still jumped 44% to $10 billion. And Nike's 10% expansion rate seems weak compared to rival Lululemon Athletica, which grew sales by 29% in the most recent quarter .
The case for optimism
Nike doesn't appear to be losing its grip on the athletic footwear and apparel market, however. Management said they saw strong demand for new products across the Nike, Jordan, and Converse brands. And the pipeline is even more stacked for the next few quarters.
That inventory spike is driven by short-term issues, too, like sped-up holiday season deliveries and the temporary closure of factories in Vietnam and Indonesia a year ago. Nike will still have to continue sacrificing profitability to work through that extra inventory, and that's a big reason why the apparel stock is down this year.
But it isn't a challenge that is likely to stick around for long. On the contrary, Nike's profit margins should return to a rising pace as it sells more products directly to consumers rather than relying on retailer partners like Foot Locker.
A solid discount
In the meantime, investors are getting a great discount on Nike's stock in exchange for that rocky short-term outlook. You can own Nike for three times annual sales, a valuation that hasn't been around since the early days of the pandemic. Lululemon, for context, is trading at 5.4 times sales.
It is possible that Nike's valuation will contract further and that investors will get a chance to buy shares of this global industry leader at a deeper discount. But don't let that prospect keep you away from the stock now. It's a good practice to try to build up a stock position over time, after all, with a few purchases spread out so you minimize the risk of buying just before a market swoon.
Taking that approach would allow you to establish part of your full position in Nike now, with an aim toward one or two more purchases down the road. Whatever strategy you prefer, it seems likely that the business will be posting more impressive earnings in a few years after the dust settles from the recent supply chain issues. In other words, Nike will be back.
