Investors haven't been thrilled with Nike (NKE -1.23%) stock so far this year. While the footwear specialist has posted generally strong operating results, Wall Street ignored those successes and instead favored more exciting growth stocks. Nike shares are down through early August while the S&P 500 is up 17%.
That underperformance might not last long. There are some good reasons to like Nike here, beyond just the relatively cheap price right now. Let's take a closer look at two factors that could drive higher returns for shareholders.
Green flag 1: Solid growth
Nike's late-June earnings report was better than it might appear at first glance. Its reported 5% sales increase rises to 8% once you account for currency exchange rate swings. Nike's e-commerce sales, which reflect direct connections with consumers, plus higher margins, are booming. This sales channel was up 18% in the quarter that ended in late March.
Compare that result with Foot Locker, which announced a 9% comparable-store sales drop in the latest quarter while citing a weakening consumer spending environment. Nike wasn't as impacted by this situation, indicating excellent brand and marketing strength in addition to a steady stream of popular product innovations.
"Nike's strong results make clear that our strategy is working," CEO John Donahoe said in a press release. Investors are likely to benefit from continued wins along these lines.
Green flag 2: Inventory
Nike has, for several quarters, been working to get its inventory levels back in line with demand. This strategy has pressured profit margins through promotions and higher sales at its factory outlet locations even as prices rose for some popular footwear products like the Jordan and Air Max lines. You could see evidence of this challenge showing up in gross profit margin, which was down 1 percentage point in the past quarter, to 44% of sales, and declined 2.5 percentage points for the full fiscal 2023 year.
Yet inventory levels fell this past quarter, marking a return to healthy levels. Not only is this good news for profitability going forward, but Nike's aggressive moves on this score put it ahead of the competition. As a result, the company is positioned to capture more of the footwear industry's profits over the next few quarters.
"We feel very good about the results driven by our decisive actions over the past year," CFO Matthew Friend said in a conference call with investors.
The right price
Nike put some hard numbers behind those positive comments. The company is projecting a rebound in gross profit margin in 2024 that nearly reverses this past year's drop. Sales growth should be close to the 8% rate that investors saw in the most recent quarter, after adjusting for currency swings.
The stock seems attractively priced today given those green flags. You can buy Nike for 3.3 times sales, down from recent highs above 4. Lululemon Athletica, for context, is priced at nearly 6 times the past year's sales.
Sure, Nike isn't as profitable, and isn't growing as quickly as its smaller athleisure peer. But the company is positioned for a sales acceleration once industry trends improve, and profits are likely headed higher. Consider adding this stock to your watch list before Wall Street catches on to Nike's growth rebound.
