Footwear and apparel giant Nike (NKE 0.11%) hasn't quite been a bright spot for investors this year, down over 11% as of Aug. 20. Some concerns about Nike are business-related, but many are broader concerns about the economy and how that could affect consumer spending.
Whatever the reason, I believe the pessimism toward the company is shortsighted. Nike still presents a compelling opportunity for long-term investors.
1. Nike's financials remain strong despite setbacks
Much has been made about Nike's slowing year-over-year (YOY) sales growth. In its fourth quarter (ended May 31), Nike's YOY sales were up 8% when accounting for exchange rate changes. While not too shabby, it's down from the 19% and 27% YOY growth it had in Q3 and Q2, respectively.
When you zoom out, revenue growth was solid for Nike's 2023 fiscal year. The $51.2 billion it made was up 16% YOY. Say what you want, but the company remains a cash cow.
In all fairness, the drop in net income -- down 28% YOY to $1 billion -- isn't ideal, but it also shouldn't be alarming when you consider a lot of the reasons behind it should be temporary. Higher markdowns, advertising and marketing expenses, and general selling and administrative expenses can be easily addressed.
The company has more than $10 billion of cash on hand, so the balance sheet will remain strong while it goes through this pandemic recovery period.
2. Inventory issues seem to be improving
The COVID-19 pandemic took a huge toll on global supply chains. At first, it was shortages due to factories and manufacturers shutting down. For many retailers like Nike, it soon became an excess inventory problem as shipments finally went out and production ramped up and exceeded demand.
At the end of its Q2 (ended Nov. 31), Nike's inventory levels were up 43% YOY. At the end of Q3 (ended Feb. 28), they were up 16% YOY. In Q4, it was essentially flat YOY.
| Quarter | Amount of Inventory on Balance Sheet |
|---|---|
| Q1 2023 | $9.7 billion |
| Q2 2023 | $9.3 billion |
| Q3 2023 | $8.9 billion |
| Q4 2023 | $8.5 billion |
Data source: Company filings.
Although Nike's inventory is still higher than preferred, it's headed in the right direction. The company increased promotions and marketing to help move through the inventory, but it's had a two-sided effect. It's helped go through inventory but also cut into gross profit margins, down 2.5% to 43.5%.
With inventory approaching more ideal levels, the company should be able to cut back on those expenses and expand its margins.
3. The stock seems fairly priced
After Nike's stock price struggles this year, the stock seems to be trading at reasonable prices. Its price-to-sales ratio, which compares stock price to revenue, is just over 3.2 -- far below what it's been over the past few years.
Data by YCharts.
It also helps that Nike offers a dividend. Its quarterly payout is $0.34, which works out to around a 1.3% yield. It's just below the S&P 500's average but still enough to give investors an extra margin of safety and more upside.
There's a lot to be said about being the market leader with as much market share as Nike. Cyclical struggles shouldn't deter investors away from a company that has shown a commitment to innovation and withstanding the problems it runs into.
