Nike (NKE +0.48%) is unusually cheap these days after Wall Street left it out of the recent rally. Shares declined 7% in 2023, in fact, to make the footwear giant one of the worst-performing members of the Dow Jones Industrial Average.
There were some good reasons for the slump, as Nike is struggling with weak demand trends and a heavily promotional selling environment. These challenges won't last forever, though, meaning patient shareholders have a chance to see excellent returns from buying the stock while pessimism is running high on Wall Street.
But is Nike a good buy or a value trap right now? Let's dive right in.
Just how cheap is Nike's stock?
Nike looks cheap when judged against its recent earnings. Investors are paying about 29 times profit today, down from the early 2022 mark of roughly 40 times earnings. Foot Locker, one of its retailing partners, is priced at 34 times earnings today, and Lululemon Athletica is going for over 60 times profit.
NYSE: NKE
Key Data Points
The discount is even more prominent with respect to sales, which can smooth out volatility around profit swings. You have to pay only about 3 times annual revenue for Nike stock right now, a valuation level that investors have seen just a few times in the past several years, and only briefly at that.
The struggles
Of course, that discount reflects some significant operating challenges affecting the footwear giant today. Despite a steady flow of new product releases, sales fell 1% in the most recent quarter that included the start of the holiday shopping season. Nike is being pinched by weaker demand across its digital and in-store selling channels as shoppers become more cautious in their discretionary purchases.
Sneaker fans are increasingly looking for deals, too, which has retailers cutting costs aggressively right now. "We saw softness in digital traffic and higher levels of promotional activity across the marketplace," executives told investors in a recent conference call.
Good news
On the bright side, Nike's profits are holding up well in this tough environment. Cost cuts and prudent inventory management are helping. Nike is also showing off its pricing power, with average prices rising this past quarter. Demand was especially strong in its higher-priced shoes that sell for over $100, executives said in late December.
You can see the positive impact of these wins in several of Nike's financial metrics. Gross profit margin rose last quarter and earnings were up 27% after adjusting for currency exchange rate shifts. Gains here suggest the stock could rally sharply as profits soar once the footwear industry starts growing again.
Watch the stock
Unfortunately, things will likely get worse before that rebound begins. Nike is projecting even weaker sales trends in the second half of this fiscal year. The company has sped up plans to cut inventory levels further and to slow down the flow of supply to its retailing partners.
Nike is preparing to get back on the offensive with a stepped-up pace of new product launches beginning in fiscal 2025. In the meantime, the focus is on extending the positive momentum that investors are already seeing around profitability.
Yet shareholder returns could remain weak until Nike can show real progress at accelerating its growth. Most investors will want to simply watch this stock, then, despite its unusually cheap valuation right now.
