Nike (NKE 0.19%) stock fell for an 11th straight day last Thursday as pressures mount for name brand and big box retailers alike. The main catalyst for Nike's accelerated sell-off was disappointing news from Foot Locker, which fell over 28% on Wednesday in response to weak quarterly results.
Let's put the pieces together to see if Nike is positioned well in this challenging period or if the Dow stock is simply too risky to buy now.
Image source: Getty Images.
Solid results
When Nike reported its fourth quarter and full-year earnings results for fiscal 2023 in late June, spending on consumer discretionary products like sneakers was still strong. Nike finished the fiscal year on a high note and booked double digital retail sales growth in North America to cap off a record revenue year. "This quarter left no doubt, sport is back, consumer confidence is rebounding, and Nike's brand momentum is growing," said Nike CFO Matt Friend on the Q4 fiscal 2023 earnings call.
NKE Revenue (Annual) data by YCharts
The full-year results were good compared to pre-pandemic figures. But Nike's net income and operating margin in fiscal 2023 fell below fiscal 2022 and fiscal 2021.
Confidence is waning
Since Nike's report, there have been a lot of disappointments around earnings and guidance from big-name retailers and consumer discretionary companies. Target reported strong results but is seeing an ongoing shift away from discretionary goods toward lower-margin staples. It has reduced its inventories in preparation for a weak second half of the year. Nordstrom reported solid results on Thursday but expects full-year sales to be lower in 2023 than in 2022.
The first-quarter report for Nike's fiscal 2024 is scheduled for late September. And the fear is that Nike's results and guidance may be worse than expected.
Nike stock reached an all-time high in 2021 on the back of great results and a boom in pandemic-induced consumer discretionary spending. In hindsight, it's clear that the boom may have pulled forward some of Nike's future sales and created unrealistic expectations for investors, which has contributed to a 45% decline in the stock from that all-time high.
The big picture
The good news is that the long-term investment thesis for Nike looks better than ever. Nike has never had more control over its products than now. The success of Nike's direct-to-consumer offerings -- Nike Direct and Nike Digital -- (especially in the U.S. and China) is encouraging.
One of the key elements of Nike's long-term investment thesis is that the nearly 60-year-old brand is resonating with younger generations. The rising acceptance of wearing sneakers instead of dress shoes in many business casual settings, as well as a growing remote workforce, is excellent news for Nike. Nike also believes that the consumer is increasingly health conscious and focused on wellness, especially Gen Z, which is a long-term tailwind for Nike's activewear.
Nike's biggest strength is its brand. At the end of the day, all of the sponsorships, spokespeople, and promotions center around reinforcing the brand. Nike's success with the younger generation in the midst of fierce competition illustrates why Nike is here to stay.
It's time to take a look at Nike stock
Despite the sell-off, Nike stock isn't all that cheap, with a price-to-earnings (P/E) ratio of 30.2 compared to a 10-year median P/E ratio of 31.3. However, the company has a clear path toward steadily growing earnings and margins over time as Nike Direct and Nike Digital make up a larger portion of overall sales. And the long losing streak ended on Thursday, followed by a solid run of bullish daily moves.
Nike is one of those blue chip companies that an investor can count on to persevere through a downturn in the business cycle, and likely take market share when its peers are backpedaling to make ends meet. Given the premium valuation, perhaps the best way to approach Nike is to simply open a starter position and look to gradually add to the stock over time instead of going too deep all at once. After all, if consumer discretionary spending continues to decline, Nike could find itself in a difficult period and the stock could face even more pressure.
