Tough economic times are a good reminder of why it's so important to hold established, safe stocks in a portfolio and not put all of your eggs into the growth investing basket.
For example, even the Dow Jones Industrial Average, a composite of 30 top stocks and itself an indicator of overall market activity, has outperformed the S&P 500, a much broader market indicator with a more varied group of stocks, over the past year. The Dow fell 7% versus the S&P 500's 12.3% loss.
Athletic-wear leader Nike (NKE -0.99%) is a Dow stock that is demonstrating why it's still a winner and why investors can be confident in its continued ability to beat its competition and post strong growth.
The power of the brand
Nike has incredible brand power. It's leveraging its popularity to build a community, leading to deeper engagement and higher sales. This also allows it to charge premium prices, which lead to higher gross margins and stronger profitability.
Nike has more sales than most of its competitors combined. That includes Adidas, Lululemon Athletica, Under Armour, and Skechers.
NKE Revenue (TTM) data by YCharts.
Those just comprise its biggest competitors in athletic wear, but it has also become much bigger than any other apparel company in the U.S. Nike consistently comes in as the top brand choice among teens for both apparel and footwear, and by a wide margin. Converse, which Nike owns, is the second-most-popular footwear brand.
In its fiscal 2023's third quarter (ended Feb. 28), Nike toppled analyst expectations for sales and earnings growth. Sales increased 14% over last year to $12.4 billion, and earnings per share (EPS) decreased 9% to $0.79. The average analyst expectation was $11.4 billion in sales and $0.56 for EPS.
Fending off challengers and challenges
Right now, Nike is in a very comfortable position as the clear leader in its industry. One of the decisive strategic moves it has made over the past few years has been to focus intensely on its direct channels, both online and in stores. They work together to drive brand recognition and sales, and the digital channels play an outsized role in reaching customers to create a community of loyal fans. Digital sales increased 24% in the third quarter.
Nike was one of the first retailers to warn investors about impending pressure last year, and it jumped into an efficiency plan to deal with oncoming inflation. However, it's been rough. Inventory increased 44% year over year in the first quarter and 43% in the second quarter. The company made progress in reducing inventory in the third quarter; it was up 16% over last year but down 4% from the second quarter.
Nike had to turn to markdowns to get rid of some of that inventory. This move, together with increased shipping costs, impacted its its gross margin, which fell 3.3 percentage points year over year to a still-impressive 43.3%. The company is now well-positioned to return to greater efficiency.
As for the future, Nike's powerful customer engagement gives it greater insights into what shoppers want. It meets those needs with new and improved product rollouts. That, in turn, gives it a head start in fueling future growth.
An attractive entry point
Nike shares trade at a price-to-earnings ratio of 34. That's not cheap, but it's well below the five-year average of 47. Investors may be rewarding the stock with a premium valuation because it's so dominant and reliable for growth.
NKE PE Ratio data by YCharts.
Nike stock is down 10% over the past year, but Wall Street analysts are predicting that it could gain as much as 55% over the next 12 months. Nike stock could be an excellent addition to a diversified portfolio of stocks that compound over time.
The stock also pays a dividend that yields 1.1% at the current price, and it has raised that dividend annually since 2004. Long term, Nike is an excellent stock pick for value and security and offers shareholders years of growth potential.
