Nike (NKE 0.19%) has certainly been a household name for a long time. And it has rewarded investors. Shares have increased nearly 12-fold in the last two decades, a gain that crushes the S&P 500 by a wide margin.
However, it hasn't been fun for shareholders in recent times, as the stock has underperformed the major index in the last five years. And as of this writing, Nike is 42% below its peak price. This might have put the stock on your watch list.
But before investing in this top apparel and footwear stock, it's best to understand the bull and bear cases as we look at 2024.
Reasons to be optimistic
There's no denying that Nike has long operated from a position of competitive strength. And the key to the company's economic moat is its powerful brand. This has been developed over the decades thanks to Nike's marketing prowess and athlete endorsements, which associate the brand with a winning mentality.
According to Interbrand, Nike's brand is an asset worth $54 billion, making it the ninth-most valuable in the world. This is also exemplified in the company's gross margin, which has averaged 44.8% in the last decade.
Nike's executives have done a wonderful job bolstering the company's digital foundation. As part of a strategic shift that has been years in the making, the business is focused on innovation, speed to market, and growing the direct-to-consumer business. In fact, a few years ago, CFO Matt Friend said the goal was to one day generate half of all sales from the digital channel.
Nike's digital apps have been incredibly popular, now amassing hundreds of millions of members. Not only does this help to increase accessibility and convenience for consumers, but it also provides valuable data and insights for the business to utilize in marketing and product decisions.
Because Nike is at a more mature stage in its lifecycle, and the business model and long been proven out, the company is sustainably profitable. The net income margin has averaged 10.2% in the last five years, which investors should appreciate because it reduces the risk of running into financial trouble.
Additionally, Nike consistently generates lots of free cash flow, allowing the leadership team to pay a dividend and buy back stock. In the latest fiscal quarter, the business returned $1.7 billion to shareholders.
Don't forget the downside
The past couple of years have been unique in that supply chain issues have caused problems for apparel businesses. In Nike's case, it has been improving its inventory glut, which has pressured profitability in the recent past.
And to its credit, Nike's gross margin expanded in the latest fiscal quarter. But there will always be the constant struggle of trying to balance the need to plan for demand changes with making sure adequate inventory is in stock. This has proven difficult, and in the future, too much merchandise will once again lead to heightened promotional activity, negatively impacting margins.
Ongoing macroeconomic uncertainty, like higher interest rates and inflationary pressures, are hurting demand trends for Nike. Management downgraded the sales outlook for fiscal 2024 from a mid-single-digit rise to a 1% gain. Executives highlighted increased macro headwinds and a stronger U.S. dollar as key reasons for the disappointing forecast.
Besides these more pressing challenges, investors can't ignore a bigger-picture reality about the apparel and footwear industry, and that's the intense competition. There are larger players, like Adidas, Under Armour, Puma, and Lululemon Athletica, to deal with. And there are also a ton of younger businesses, like On Holdings, Hoka One, Gymshark, and ASRV.
Nike has obviously been successful over the decades at strengthening its brand, but the leadership team needs to continue prioritizing maintaining the company's differentiation in the industry. This is especially true given the low barriers to entry for competitors.
By gaining a better grasp of both sides of the aisle, investors are now well informed to make a better decision about Nike stock.
