Disney (DIS -0.58%) and Nike (NKE -0.06%) both disappointed the bulls in 2022. The House of Mouse lost 44% of its value as investors fretted over its streaming media losses and inflationary headwinds. Nike's stock dropped 30% as investors worried about its rising inventories and shrinking margins. But could either of these iconic companies bounce back this year?
What happened to Disney?
Disney's revenue and adjusted EPS rose 23% and 54%, respectively, in fiscal 2022 (which ended last October) as its core media and theme park business returned to growth in a post-pandemic market. However, Disney's operating margin still plunged 660 basis points to 7.7% for the full year as the operating loss at its direct-to-consumer (DTC) segment -- which houses its streaming media platforms -- widened from $1.7 billion to $4.0 billion.
Image source: Getty Images.
Yet the bulls will argue those losses are justified. Disney ended fiscal 2022 with 235 million paid subscribers across all its streaming services (Disney+, Hulu, and ESPN+), representing 31% growth from a year earlier. By comparison, Netflix's total number of paid subscribers only increased 5% year over year to 223 million in its latest quarter.
Analysts expect Disney's revenue and adjusted EPS to increase 8% and 17%, respectively, in fiscal 2023. Inflation might curb consumer spending on theme park tickets and movies, but its streaming losses could gradually narrow as economies of scale kick in. Disney's stock looks reasonably valued relative to those growth rates at 23 times forward earnings.
But there's still a lot of uncertainty regarding Disney's longer-term prospects. Bob Iger, who returned to the CEO post last November, plans to reverse some of the cost-cutting measures implemented by his predecessor Bob Chapek. But at the same time, activist investor Nelson Peltz is trying to gain a seat on Disney's board while forcing it to cut costs and find a suitable successor for Iger within the next two years. That brewing conflict could distract Disney from improving its core businesses as the macro headwinds force consumers to become more selective with their entertainment options.
What happened to Nike?
Nike's revenue grew 6% in constant currency terms in fiscal 2022 (which ended in May 2022) as its adjusted EPS rose 5%. Its growth cooled from the previous year as it lapped its post-pandemic recovery, inflation curbed consumer spending, and China implemented new COVID-19 lockdowns. But for fiscal 2023, Nike sees its revenue rising by the "low teens" on a constant currency basis as it resolves some of those challenges.
Nike expects its stronger growth in North America, Europe, and other regions to offset its pandemic-induced slowdown in China, which might gradually recover as the COVID restrictions are relaxed. For fiscal 2023, analysts expect Nike's revenue to grow 7% on a reported basis but for its adjusted EPS to decline 17% as its gross margins remain under pressure.
Nike's inventories rose more than 40% year over year in the first half of the year amid volatile transit times in North America and tough comparisons to its factory closures in fiscal 2022. It intends to liquidate those excess inventories with steep markdowns -- which will likely reduce its gross margin by 200-250 basis points to 43.5% to 44% for the full year.
On the bright side, Nike is offsetting some of that pressure by raising its prices for its premium products. Its Nike Direct business, which now accounts for over 40% of its revenues, is also generating robust growth as it sells more products through its e-commerce platform and brick-and-mortar stores. That DTC growth will reduce its dependence on middlemen retailers.
Nike's gross margins should eventually stabilize again, but its stock still looks a bit too expensive at 39 times forward earnings. Its rival Adidas, which faces much tougher near-term headwinds, trades at 30 times forward earnings.
The better buy: Disney
Disney and Nike will both face a lot of challenges in 2023. I wouldn't rush to buy either stock right now, but I believe Disney is the better turnaround play because it's more deeply diversified, it's growing faster, and it's cheaper. Nike is still a solid investment, but its stock simply looks too expensive relative to its near-term growth and its industry peers.
