For a brief time earlier this year, it looked like Nike (NKE -2.62%) shares were going to bounce back from 2022's steep sell-off. Then, pow! Shares are down more than 20% from May's peak, and as a result of that pullback are now sitting 42% below their all-time high from late 2021. Problems created by the COVID-19 pandemic are still lingering, particularly in China. Economic weakness everywhere else isn't exactly helping, either.
Take a step back and look at the bigger picture, though. This is still the world's biggest and best-recognized athletic apparel brand, and it's still growing its top and bottom lines despite bumping into a handful of headwinds. The biggest factor working against Nike stock right now is just worry that this year's renewed weakness is taking on a self-sustaining life of its own. Once a couple more rounds of encouraging quarterly results are in the books, don't be surprised to see this stock start rallying again.
In fact, that bullishness may well materialize before Nike reminds the market it's doing just fine.
Plenty to pick apart
Don't misunderstand; Nike's got its challenges to be sure.
China and too much inventory are its two top headaches right now. It closed out last year with more goods than it could effectively handle, prompting margin-crimping markdowns in the meantime. And although its sales in the Greater China market improved 16% year over year during the fiscal 2023 fourth quarter (ended May 31), the country's economy has been somewhat stifled since then. Rather than accelerating to the expected growth pace of 4.5% in July, China's retail spending growth actually fell to 2.5%, down from 3.1% in June. The nation's unemployment rate among young adults -- Nike's best customers -- is particularly high, suggesting last quarter's measurable strength in China isn't built to last.
That's a problem since China accounts for around 15% of Nike's total revenue.
Meanwhile, although it was a seemingly brilliant idea at the time, Nike's decision to pare back relationships with retailers and expand its online business as well as its own brick-and-mortar footprint hasn't exactly panned out as hoped. Several stores have abruptly been shuttered this year, and the recently "revitalized" relationship with Foot Locker suggests the athletic apparel giant now realizes it couldn't reach every prospective customer on its own.
You don't own stocks for where the underlying company's been, however. You own them for where the company's going, and where Nike is going is still plenty compelling.
Nike is on the right track
Sure, keep your finger on the pulse of China's consumer market. Late last year and early this year, it looked like the end of China's heavy-handed COVID-19 lockdowns would unleash lots of pent-up consumer spending. And for a short while, it did. Not unlike their counterparts everywhere else, though, China's consumers are finding themselves struggling to keep up with inflation in an increasingly sluggish economy.
That's a backdrop, however, that could soon force China's government officials to inject stimulus into its economy.
Also, bear in mind that while the consumer piece of China's economy was healthier earlier in the year than it is now, it was never exactly robust. Nike's sales in Greater China improved 16% (and 25% on a constant-currency basis) last quarter anyway. It's arguable Nike is one of a handful of brands that can stand up to the region's economic malaise.
And as for last year's inventory bloat, it's mostly under control as well.
At $8.5 billion, inventory levels as of the end of May were essentially in line with year-ago levels. But that's well below the peak of nearly $9.7 billion headed into the final calendar quarter of last year. It's also only two-thirds of the May quarter's top line of $12.8 billion, which is more or less in line with pre-pandemic norms.
Data by YCharts.
Gross margin rates are now at 43.6% of sales, which is below average, but not wildly so. These numbers suggest Nike has been able to work through most of its excess inventory without taking massive markdowns ... a hurdle that first started to be cleared a quarter earlier. Indeed, given the trajectory of all of these numbers, Nike's inventory woes may already be in the rearview mirror even if the market's not seeing it. Analysts are, though, as they're calling for sales growth of roughly 5% this year to accelerate to a pace of nearly 8% next year. Earnings are expected to improve at an even faster clip.
Data source: StockAnalysis.com. Chart by author.
The analyst community also thinks Nike's worth $127.25 per share, more than 27% above the stock's present price.
Don't overthink it
So why are the majority of investors remaining so fixated on Nike's past that they can't see its plausible future, or even its present?
It happens all too easily -- and more often than you think -- with high-profile stocks most consumers know and hear about on a regular basis. The seeds of doubt regarding things like swollen inventory levels or trouble in China are easily sown. Without the proper context or perspective, these seeds just as easily take root. The crowd then comes to conclusions based on a stock's poor performance, connecting it to alarming headlines. As was noted, these things truly can take on a life of their own. That's arguably what's happening here with Nike and its stock.
The good news for forward-looking investors is that these impasses always eventually give way ... once there's enough proof the company in question is in no serious danger. You just have to be patient.
Of course, with Nike already down more than 40% from its peak and more than 20% in the past few months, you might want to make a point of jumping into Nike stock sooner rather than later. A handful of investors are already starting to see and understand the bullish arguments being laid out here.
