Due to multiple macroeconomic pressures, some high-profile footwear makers and retailers have struggled heavily in 2023. Nike (NKE 0.19%) stock has fallen roughly 15% year to date. Meanwhile, Foot Locker (FL 0.23%) has fared even worse and seen its share price plummet roughly 45% across the stretch.
Which of these consumer goods stocks is the better buy right now? Read on for a look at the pros and cons of investing in each stock and a definitive verdict on which stock is likely to be a better long-term performer for your portfolio.
The pros and cons of investing in Foot Locker
On the heels of some big sell-offs, Foot Locker stock is looking quite cheap by some metrics. The company is trading at roughly 15.6 times this year's expected earnings and roughly 25% of anticipated sales.
Due to the appeal of being able to visit a physical location to try on footwear, Foot Locker's business has some degree of protection against e-commerce trends that otherwise continue to disrupt retail. The company also has its own e-commerce operations to soften the blow from online retail trends.
Facing unexpectedly soft consumer demand due to macroeconomic pressures and other factors, Foot Locker has seen sales continue to decline this year. But the company's stock could have big upside if the business can stabilize its sales picture and improve margins through cost-saving initiatives. On the other hand, recent performance makes it harder to put faith in a turnaround.
Take a look at the chart below, which outlines changes in annual sales and non-GAAP (adjusted) earnings guidance that Foot Locker management has made in conjunction with its recent earnings reports.
|
Guidance Timeline |
Projected Sales Decline | Projected Adjusted Earnings Per Share |
|---|---|---|
| Guidance issued March 2023 | Between 3.5% and 5.5% | Between $3.35 and $3.65 |
| Guidance issued May 2023 | Between 6.5% and 8% | Between $2 and $2.25 |
| Guidance issued August 2023 | Between 8% and 9% | Between $1.30 and $1.50 |
Data source: Foot Locker.
Management had initially billed 2023 as a significant turnaround year for the business, but it now looks like that will fail to materialize. When you compare midpoints from the guidance ranges, you'll see the company slashed its expected adjusted earnings forecast for this year by roughly 34% from its May target. Compared to the midpoint of the earnings guidance that was issued in March, the current target is down 60%.
Foot Locker's earnings target has actually declined more than its share price this year, which suggests there's more room for valuation volatility in the near term. And even though trying on shoes at physical locations has appeal, it's unlikely that the business will be able to avoid pressures from the decline of malls and broader online retail transformation over the long term.
The pros and cons of investing in Nike
Even with some challenges this year, Nike remains a top brand and has clear leadership positions in the footwear and apparel markets. The company grew revenue 2% year over year in the first quarter of its current fiscal year, which concluded at the end of August. Meanwhile, earnings per share were up 1% compared to the prior-year period.
Despite some significant headwinds, Nike is still managing to serve up sales and earnings growth. The company also continues to generate relatively strong gross margins, coming in at 44.2%. Manufacturing its own products and having e-commerce and other direct-to-consumer sales channels puts the company in position to keep posting better margins than retail-only businesses, including Foot Locker.
Nike also pays a dividend. Following sell-offs for the stock this year, the dividend yield has been pushed up to 1.4%. The company has also done an impressive job of regularly boosting its payout, increasing its annual distribution to shareholders roughly 55% over the last five years and 183% over the last decade.
On the other hand, Nike trades at a much more growth-dependent valuation than Foot Locker. Valued at roughly 26.7 times this year's expected earnings and 2.8 times expected sales, some degree of performance recovery is already priced into the footwear leader's share price.
NKE PS Ratio (Forward) data by YCharts
If Nike's sales and earnings growth were to stabilize at their current levels, it's reasonable to expect that the company's share price would fall dramatically. Efforts to expand in China and other growth projects haven't been panning out as anticipated lately, and the business needs to prove it can return to posting stronger sales and earnings momentum.
So which stock is the better buy?
While both companies are facing macroeconomic pressures, Nike ultimately looks better positioned to perform well over the long term. Foot Locker's business is still heavily dependent on malls, and it's likely to continue struggling as foot traffic to these locations broadly continues to decline. E-commerce initiatives should give the business some support, but Foot Locker actually loses one of its key advantages as it leans more heavily on online retail.
Nike is also significantly dependent on sales through malls and other physical locations, but not nearly as much as Foot Locker. The sneaker-and-apparel maker has been making a big e-commerce and direct-to-consumer selling push for many years now, and its brand strength should help it navigate changes in its industry.
Even though Nike's valuation is significantly more growth-dependent than Foot Locker, it stands out as the better buy for long-term investors.
