Nike (NKE -2.49%) and Adidas (ADDYY 0.71%) both underperformed the market in 2022 as inflation and other macro headwinds curbed consumer spending on discretionary products. Nike's stock declined about 30% over the past year, while Adidas' stock tumbled more than 50%.

But could those steep declines actually represent good buying opportunities for investors who can tune out the near-term noise? Let's take a closer look at both athletic footwear and apparel giants to decide.

A person shops for sneakers at a shoe store.

Image source: Getty Images.

Nike's prospects are brightening

Nike's revenue only rose 6% in constant currency terms in fiscal 2022 (which ended in May 2022), compared to 17% growth in fiscal 2021, as earnings per share (EPS) increased 5%. Nike's growth cooled off for three main reasons: It lapped its post-pandemic recovery, inflation worsened, and China implemented more COVID-19 lockdowns. But for fiscal 2023, Nike expects revenue to rise by the "low teens" on a constant currency basis as some of those headwinds wane.

The growth of the Nike Direct segment, which houses Nike's direct-to-consumer (DTC) online and brick-and-mortar sales, accelerated in the first half of fiscal 2023 and accounted for over 40% of revenue. Some of that sales growth was driven by markdowns on lower-end products, but Nike offset some of that pressure with price hikes on its premium products.

Its strong sales in North America, Europe, and other markets also largely offset its declining sales in China -- which could stabilize next year as the country loosens its "zero-COVID" restrictions. However, Nike's inventories still rose more than 40% year over year in the first two quarters of the year, and it expects gross margin to decline 200-250 basis points to 43.5%-44% as it attempts to liquidate excess inventories in the second half of the year. 

For now, analysts expect Nike's revenue to rise 7% for the full year as earnings decline 17%. But for fiscal 2024, analysts expect revenue and earnings to grow 8% and 27%, respectively, as Nike's business gradually stabilizes.

Adidas faces tougher challenges

Adidas' revenue rose 16% in constant currency terms in 2021, and net earnings from continuing operations more than tripled. But for 2022, Adidas expects revenue to only rise at a "low single-digit rate" on a constant currency basis. It attributed that slowdown to COVID-19 lockdowns in China, inflationary headwinds, the suspension of its business in Russia, and the termination of its partnership with Yeezy, the brand owned by Kanye West (now known as "Ye"), after the musician made a series of antisemitic comments in October. Yeezy's sales had accounted for roughly 8% of Adidas' revenue in 2021.

Adidas only generates about a fifth of its revenue from its DTC channels, so it's a lot more dependent on wholesale retailers than Nike. That fragmentation increases the risk of its premium appeal being diminished by discounts across middlemen retailers. Its DTC sales only rose 6% year over year in the third quarter, compared to Nike's 25% DTC growth in its latest quarter, and Adidas mainly attributed that slowdown to its loss of DTC sales to Russia. Excluding its sales to Russia and its neighboring Commonwealth of Independent States (CIS) regions, Adidas' DTC sales would have increased by double-digits.

Adidas' inventories jumped 72% year over year in the third quarter, compared to 35% growth in the second quarter and 15% growth in the first quarter. The company expects gross margin to contract 370 basis points to 47% in 2022 as it tries to liquidate some of those inventories -- but it noted that discounts were already offsetting some of its price hikes.

Analysts expect Adidas' revenue to rise 8% this year, but for EPS to decline a whopping 70% as the company marks down more merchandise. But next year, analysts expect revenue and EPS to grow 5% and 54%, respectively, as Adidas laps those challenges.

The valuations and verdict

Nike and Adidas trade at 29 times and 25 times next year's earnings, respectively. Neither stock looks like a screaming bargain yet, and both companies still face tough near-term challenges from inflation and higher inventories. But if I had to choose one of these athletic footwear and apparel makers over the other, I'd pick Nike. It has a beefier DTC business, less direct exposure to the Russia/CIS region, and isn't heavily exposed to the whims of a single celebrity.