If you purchased shares of Nike (NKE -2.09%) five years ago, you would be sitting on a loss of 5%, including the positive impact of dividends. That's a wildly disappointing return from an industry-leading enterprise.
For comparison's sake, an investment in the S&P 500 index would've almost doubled your capital. But maybe the pessimism surrounding Nike has hit a low, and things will turn around for the better.
Where will this consumer discretionary stock be in five years?
Trying to right the ship
Nike's disappointing stock performance is not without reason. This company has been grappling with issues. In the fiscal 2024 fourth quarter (ended May 31), Nike reported a surprising 2% sales drop. And for the current fiscal year, the outlook calls for revenue to be down mid-single digits. Numerous factors, like weakness in China, softer sales of key product lines, and macro uncertainty, deserve blame.
Nike's latest struggles point to just how difficult it is to consistently dominate the apparel and footwear industries. Competition is incredibly fierce, as there are virtually no barriers to entry preventing new firms from entering the market. Nike is under constant threat from rivals.
Making matters even more challenging, is the ongoing need to not only predict what styles and designs consumers will gravitate to, but to successfully cater to these tastes. Nike deserves credit for being on top of the industry for such a long time. However, the company's recent weakness indicates that it must always put product innovation at the core of how it operates.
What's more, Nike must figure out the correct balance when it comes to its distribution strategy. During the depths of the pandemic, when brick-and-mortar shopping was restricted, it made sense to lean heavily on digital capabilities. But now that consumer shopping behavior has normalized, Nike must fix its relationships with retail partners.
Taking the contrarian approach
No business is perfect. And even the best companies have stretches where they struggle. Nike is certainly trying to figure out solutions to its problems.
Its current valuation could present investors with a rare opportunity to buy an industry heavyweight when the narrative couldn't be any bleaker. Shares trade at a price-to-earnings ratio of 19.6. That's near its lowest valuation in the last 10 years.
There might be no better time to scoop up this stock in recent memory. However, that's only if you believe that management can right the ship, with a return to healthy revenue and earnings growth. I'd like to give executives the benefit of the doubt.
Nike isn't a bad company. It possesses one of the strongest brands the world has ever seen. This counts for something. And it should hold weight in the minds of consumers today and far into the future. Decades of impressive marketing tactics and high-profile athlete endorsements have certainly paid off.
Nike's growth has stalled. Consensus analyst estimates predict that sales will be down this year compared to fiscal 2024. But in the past decade, revenue has increased at a compound annual rate of 6.3%. I don't think it's a stretch to believe Nike can get back to posting this type of gain, provided management is laser-focused on product innovation.
It helps that Nike engages in a favorable capital allocation plan, supported by consistent free cash flow production. The company has raised its dividend for 22 straight years, paying out $2.2 billion in fiscal 2024. Nike also spent $4.3 billion on share buybacks in the past 12 months, a smart move given the stock's attractive valuation.
Given the extreme level of pessimism surrounding this business, patient investors who have conviction in Nike are set up to be rewarded over the next five years.
