They may be in the same business -- athletic apparel and footwear -- but On Holding's (ONON 2.66%) and Nike's (NKE 0.19%) stories have been dramatically different of late. On shares rallied more than 50% in 2023 on what will likely end up being top-line growth of nearly 58%. Conversely, Nike shares tumbled a bit, dragged down by tepid sales growth and a surprise mid-year earnings miss. Analysts' current views of each company suggest more of the same disparity is in the cards.
Given the choice between the two right now, however, I'd pick a new position in Nike stock over opening one in On Holding. Nike has more net upside, largely because too many people are looking at the recent past rather than the foreseeable future. Nike boasts four distinct bullish arguments that set the stage for a better 2024.
4 reasons to buy Nike stock
Don't misread the message. Investors have good reason to be a bit suspicious of Nike right now. A superficial glance at its results from its fiscal 2024 second quarter (which ended in November) indicates revenue only grew 1%, for instance. The athletic apparel brand also dialed back its full-year sales outlook, pointing to intensifying macro headwinds.
Digging deeper into the details of that Q2 report and then putting them in their proper context, however, suggests that many of the problems that have been standing in the company's way of late are now abating or soon will. Four of these impending changes stand out from the rest.
1. North America's sales headwind is temporary
Nike is an international brand. But its single-biggest market is North America, where sales fell by 4% year over year last quarter. The importance of this market augmented the impact of that setback.
There's a critical detail worth noting here, however. Many of Nike's retail partners have been closing up shop, or are at least restructuring their businesses. Foot Locker, for example, announced early last year that it would begin the closure of up to 400 of its namesake stores plus another 125 of its Champs Sports locations in a sweeping rebranding and rightsizing effort. Eastbay, Foot Locker's direct-mail operation, also ceased operations at the end of 2022.
Meanwhile, Maine-based Olympia Sports began shuttering its stores in 2022, and bankrupt Shoe City also called it quits last year, closing down another 39 selling venues. These moves are emblematic of the bigger struggle the retail side of the athletic shoe business is facing at this time. So is Nike's 2% year-over-year constant-currency decline in last quarter's wholesale revenue.
Last year was a bit of an anomaly for retailing, though. Many retailers had loaded up on inventory in anticipation of a post-pandemic rebound only to find out that demand -- and even foot traffic -- just wasn't bouncing back as robustly as expected. The fact that so many people are still working from home didn't help either.
It's a reckoning, however, that likely peaked in 2023. In fact, the headwind may well fizzle out altogether in 2024.
2. Digital and direct revenue are both improving
The slow erosion of traditional retailing is being offset by brands' own brick-and-mortar and e-commerce growth. Nike is no exception to this trend. Revenue generated by its own stores improved 4% year over year during the quarter ending in November, while digital sales were up 1% on a currency-neutral basis.
Those numbers alone aren't thrilling. But, they're phenomenal on a two-year stacked basis. In the same quarter a year earlier Nike's direct revenue grew 16%, and its online sales improved by a whopping 25% year over year. Those results were a tough act to follow.
More important, with about 40% of the company's top line now coming from its own direct sales channels, any future slow-down of third-party retailing is less and less of a problem.
3. Inventory problems are finally under control
Of course, anyone keeping close tabs on Nike for the past couple of years likely recognizes that owning and operating its own stores and online shopping app has presented problems of its own. Specifically, Nike carried a swelling level of inventory in fiscal 2022 that forced major margin-crimping markdowns in fiscal 2023.
For perspective, the company ended its fiscal 2022 with inventories of $8.4 billion, up 23% from the same point in time a year earlier. And this inventory bloat worsened last year. End result? Big-time markdowns. Gross margins fell from 46% a year before to 43.5% in the fiscal year ending in mid-2023 -- a ton of money by retailing standards -- as the company sought to shed aging merchandise that was simply getting in the way.
This lingering problem, however, finally appears to be resolving. Last quarter's inventory of just under $8 billion was not only down 14% year over year, but was the lowest inventory level the company had reported since early 2022, when the industry first began buying up goods for the consumerism rebound that never fully materialized.
Now that its supply is much leaner, profit margins should widen again. Indeed, they'll widen even more now that direct sales and its in-house e-commerce operation account for a bigger piece of its total business.
4. Nike remains an incredible brand name
Last but certainly not least, although the past couple of calendar years haven't been stellar ones for Nike, it's still a solid brand name that consumers demand. Brand consulting outfit Interbrand ranks Nike as the seventh-best global brand name of 2023, one spot behind Coca-Cola and two spots ahead of McDonald's. That's impressive.
Meanwhile, Nike remains a worldwide market leader in sports apparel, and controls roughly half of the global athletic footwear market, according to data compiled by Statista.This is no small matter.
Consumers have a tendency to purchase products made by brands they know and have likely purchased before. That's why it's so difficult to dethrone a market leader once it has established itself. And such companies can often afford to spend enough to ensure they remain ahead of their most threatening rivals.
Speaking of that task, newly named Chief Marketing Officer Nicole Hubbard Graham is the right person for the job of helping Nike maintain its lead. She was with Nike for 18 years before leaving in 2021 to help found an ad agency that counted Gatorade, Netflix, and Lululemon Athletica among its clients. Now she's back, and ready to restore Nike's former marketing prowess.
Nike vs. On Holding
Don't read too much into my optimism. Nike still has plenty to figure out, like how to fully revive its business in China and the rest of the Asia-Pacific market. In the meantime, On Holding's story is a compelling one to be sure. Its high-end athletic footwear is proving particularly appealing to millennials and the Gen Z crowd, many of whom are looking for footwear brands other than what their parents wore.
From an investor's perspective, however, picking stocks is about comparing risks and rewards, and identifying underestimated companies. You're certainly not doomed if you already own a piece of On Holding and don't have room for a new stake in Nike. If you've yet to buy either, though, and are looking for a pick from this space, Nike stock's subpar performance in 2023 makes it the better option for 2024.
