What happened
Shares of Nike (NKE 0.19%) retreated 5.7% during the first six months of 2023, according to S&P Global Market Intelligence. The bellwether consumer stock got crushed by surprisingly bad earnings from an industry peer, and Nike's lukewarm outlook for the full year confirmed that uncertainty lies ahead.
So what
Nike stock bounced around for most of the year, but it suffered a significant drop in May. There wasn't any news specifically about Nike in that month, but Foot Locker (NYSE: FL) posted some worrisome results that dragged on adjacent stocks. Foot Locker surprised Wall Street by reporting an 11% drop in sales and reducing its guidance for the full year. The athletic apparel retailer had performed favorably in the holiday season, so the May news blindsided some investors.
This sparked concerns that rippled throughout the consumer sector. As one of Foot Locker's largest suppliers, Nike's outlook fell under scrutiny. It's a case of "where there's smoke, there's fire." While Nike's decline wasn't nearly as sharp as Foot Locker's, the ominous news was still enough to wipe out all of Nike's gains from January through April.
Image source: Getty Images.
Nike wound up clawing back some of those gains, thanks in part to a market rally fueled by the Federal Reserve's decision to pause interest rate hikes. There was also a somewhat curious trend of analysts revising their forecasts higher amid all of that turmoil, sending the stock's forward price-to-earnings (P/E) ratio sharply lower. This made the stock look even cheaper relative to its fundamentals, likely enticing some value investors.
NKE P/E Ratio (Forward) data by YCharts.
Nike's quarterly earnings results at the end of June were ultimately in line with expectations, and the stock slid slightly lower thanks to lackluster guidance for the full year. Quarterly revenue grew 5% over the prior year, and profit margins dropped. This confirmed that the situation was not nearly as dire as Foot Locker's, but Nike is clearly struggling with some of the same issues. Consumer economic data is mixed, so it's hard to know what to expect from retail and consumer stocks in the short term.
Now what
Nike's 1.2% dividend yield won't excite income investors, but it's still high relative to the stock's historical levels. That's a nice avenue to lock in some gains each quarter, regardless of its price performance. Nike's forward P/E ratio is under 30, which is fairly low compared to most of its recent history.
Nike is still considered a wide-moat stock, and it has one of the world's strongest brands. After the recent swoon, the stock is at one of its most affordable points relative to the financial fundamentals. There's a strong chance that the next year will be difficult for Nike, but long-term investors should strongly consider this opportunity.
