Although shares of Nike (NKE -3.76%) are up 79% over the past five years, they dropped roughly 30% in 2022. With higher interest rates leading some experts to predict a recession in the near term, investors unsurprisingly soured on businesses that cater to consumers, whose spending could be seriously hampered in an economic downturn. The company has also dealt with its own set of challenges.
Nike shares are still down 31% from their all-time high set in November 2021, despite rising roughly 3% in 2023. Does this make the stock a buy right now?
Nike hits a speed bump
In the latest fiscal quarter (the second quarter of 2023, ended Nov. 30), Nike's revenue of $13.3 billion showed a 17% year-over-year increase. On a constant-currency basis, the growth rate was 27%.
That handily beat Wall Street expectations by $750 million, helping to send the apparel stock higher immediately following the announcement. Earnings per share (EPS) also exceeded expectations.
While the headline numbers certainly set a positive tone among shareholders, there were still some issues that can't be ignored. For one, Nike's inventory balance of $9.3 billion was 43% higher than the year-ago period.
The blame can be attributed to wacky supply chain conditions that forced the company to try to rebalance its merchandise situation. However, to boost sales and reduce the likelihood of having outdated items on its hands, Nike had to resort to elevated markdowns and promotional activity, causing the gross margin to shrink 3 percentage points from 45.9% in the second quarter of 2022 to 42.9% a year later.
On a bright note, this could be the end of Nike's unfavorable inventory glut. "We believe the inventory peak is behind us as actions we're taking in the marketplace are working," CEO John Donahoe said on the second-quarter earnings call.
Moreover, the Greater China region, which has usually been the company's fastest-growing market, saw sales decline 10% in the most recent quarter. Even if we ignore the impacts of currency fluctuations, Greater China's 4% revenue decrease pales in comparison to the more than 20% gains posted in the company's other three geographic regions.
Chief financial officer Matt Friend said, "[I]t's been nearly two years of unprecedented disruption in China, but this team's resilience, experience, and strategy have set us apart to gain momentum on all fronts." Once the situation in China stabilizes and things fully return to normal, Nike should get back to posting outsize growth in the country.
Quality characteristics
While ongoing inventory challenges, currency fluctuations, and headwinds in China continue to weigh on Nike's operations, shareholders would benefit by putting less weight on short-term concerns and more of their focus on the bigger picture. With this approach, Nike still looks like a wonderful business to consider owning.
According to Wall Street consensus analyst estimates, the company is expected to increase its revenue and earnings per share at compound annual rates of 8.1% and 11.3%, respectively, between fiscal 2022 and fiscal 2027.
Free cash flow is forecast to rise at an average annual clip of 13.5% during that time. Based on the durability and resilience of Nike's business model, I have high confidence that the company can meet, and possibly exceed, these financial targets.
What makes Nike special is undoubtedly its brand strength. Over the past few decades, the business has built up an image that is associated with winning and being up to date on the most stylish trends.
By consistently introducing high-quality and in-demand apparel and footwear, Nike has solidified its position atop the global sportswear market. Investors can bank on this not changing anytime soon.
When it comes to finding stocks to buy for the long term, a key factor is a company's staying power. Nike has this quality in abundance, as its long and successful operating history clearly demonstrates.
It also possesses ample growth opportunities. With shares down considerably from their all-time high and at a price-to-earnings ratio well below the trailing-five-year average, now might be a great time to add this one to your portfolio.
