Accruing stock market gains is more of a marathon than a sprint, but Nike (NKE 0.19%) still left investors wanting more this past year. The footwear giant's stock ended 2023 in negative territory, making it one of the worst-performing members of the Dow Jones Industrial Average. Shares haven't had a great start to the new year, either, declining 6% following last year's 7% slump.
With that tough backdrop in mind, let's look at Nike's chances of having a better year ahead from here. There are some encouraging signs of an earnings rebound on the way, but also some factors for investors to be wary about as well.
1. Slowing sales trends
The headline growth result in the holiday quarter wasn't impressive. Nike's sales rose by just 1% in fiscal Q2 after inching up by 2% in the prior quarter. Management said in a conference call with investors that several positive factors impacted the business, including rising prices and higher spending on many of its most expensive footwear models. Nike also didn't need to engage as aggressively in the promotions that are driving prices lower across the industry.
Still, the footwear business is far from entering recovery mode. Executives said industry sales were weaker than they expected through the early holiday season. That softness spanned the digital selling channel and hurt traffic at Nike's physical stores as well.
2. Things should get worse
Things will likely get worse before they get better, too. Nike is expecting the current demand slump to persist over the next six months, leading to deeper price cuts by retailers that are looking to reduce inventory.
Nike's inventory cuts last year helped keep it ahead of the game here. Yet it hasn't been enough to sync inventory up with demand trends. "Given the promotional environment and the cautious consumer behavior that we are seeing, we are stepping up our plans to reduce ... supply of our key franchises," CFO Matt Friend said in late December.
3. Watch for false starts
Nike has a lot going for it as it sets the stage for a rebound in fiscal 2025. It should get a boost from a packed calendar of product releases and from fast-growing franchises like Jordan. Add in the combination of declining costs and a slim inventory level, and Nike has a shot at much higher earnings once industry sales trends start recovering.
Yet, investors should temper their expectations. Nike has been talking about reaching a sustainably faster growth level for some time, and management hasn't yet been able to hit the target. Whether it was spiking raw material costs, supply chain issues, or stubborn demand challenges in key markets like China and the U.S., investors have been disappointed to see Nike's recovery hopes delayed several times in the past few years.
Its industry leadership position, along with the shift toward more direct-to-consumer selling, should allow Nike to meaningfully expand profitability over time. However, bigger industry forces are outside of its control, including the recent uptick in promotions by footwear retailers. The risk of these challenges lingering past fiscal 2024 is a big one for investors to watch over the next several quarters.
