The stock market was on the brink of officially attaining bull status as we turned a page on the new year, but it seems to have plateaued for the time being. All eyes are on earnings season, which is set to begin in the coming weeks.
Not all public companies report on the same schedule, and athletic-wear giant Nike (NKE 0.19%) gave its update in December. It didn't impress investors, and it portends that retailers might not report the kind of progress investors have been hoping for in the coming season. Nike stock fell after the report, and it remains down about 40% from its highs.
However, Nike is the dominant player in its industry, and this performance is mostly due to short-term industry headwinds. The stock should provide years of market-beating gains, and this is an opportunity to buy on the dip.
No competition in activewear
Nike has a lead so large in activewear that it would be very difficult for any competition to unseat it anytime soon. Its sales are more than even the combined sales of its biggest competitors -- like Adidas, Under Armour, Skechers, Lululemon Athletica, and On Holding.
NKE revenue (TTM) data by YCharts. TTM = trailing 12 months.
It has the top spot in the Piper Sandler Taking Stock With Teens annual survey (as it usually does) for both footwear and clothing. And second place for footwear went to Nike-owned Converse. These are young shoppers who will drive Nike's sales for years to come, making this an important indication of where the company is right now and how its driving future opportunity.
Inflation is weighing it down
Nike sits on the edge of premium and mass shopping, and it takes from both markets. In general, that's a good thing, and it contributes to its high sales and an untouchable lead.
However, unlike premium rivals like Lululemon and On Holding, its exposure to the mass market means it's more susceptible to economic challenges like inflation. People who would normally set aside money to buy their favorite Nike products can't necessarily do that right now.
In the 2024 second fiscal quarter (ended Nov. 30), sales inched up 1% but were down 1% on a currency neutral basis, so they were essentially flat year over year. Nike direct sales were up 6%, illustrating how strong the brand is and how the company is cultivating relationships with its loyal shoppers.
The gross margin expanded from 42.9% last year to 44.6% this year, driven by price hikes and lower supply-chain costs, and earnings per share (EPS) rose 21% from last year to $1.03.
Under pressure, management is focused on cost-cutting and efficiency. It's looking to cut around $2 billion over the next three years by leveraging more automation and technology and efficiencies through scaling.
A bargain blue chip stock
At the current price, Nike stock trades at a price-to-earnings (P/E) ratio of 31. That's not cheap, but it's well below average for the company. It trades at a price-to-free-cash-flow (P/FCF) ratio of 25, which is about half of the average over the past three- and five-year periods, and touching its lowest over those time spans.
NKE price-to-free-cash-flow data by YCharts.
Nike also pays a dividend that yields 1.4% at the current price.
At that price -- and considering its dominant position, loyal customers, and increasing profitability -- Nike stock looks like an excellent buy right now that should reward investors for years.
