Nike (NKE 2.22%) has spent decades building one of the most recognizable brands globally. It's one of the leading sneaker and apparel companies and has worked its way to a market capitalization of over $130 billion. Unfortunately for Nike and its shareholders, though, its market cap was once over $280 billion.
Nike has had its fair share of struggles over the past few years, that's for sure. But that doesn't mean all hope is lost. Or does it? Well, let's see, as these two Motley Fool contributors present the bull case and the bear case for this well-known name.
A change of course from an admitted mistake
Stefon Walters (Bull): On Sept. 19, Nike announced that its CEO, John Donahoe, would be replaced by Elliott Hill. Donahoe has held the position since January 2020, but the move was all but inevitable given the company's struggles and missteps.
Arguably, Nike's biggest misstep under Donahoe's leadership was its overoptimism about how well it could thrive by leaning heavily on a direct-to-consumer model. The company had always relied on middlemen to get its products to consumers. Department stores, sporting goods retailers, and the like all played a major part in Nike's distribution.
But the growth of online orders and the success of its popular app, SNRKS, led management to believe it could cut out those stores. It severed ties with major retailers like Macy's, Urban Outfitters, Dillard's, and a handful of others. This proved to be a major miscalculation.
Hill has the benefit of seeing this misstep and getting Nike back to its balanced model, which should help with sales. It won't be an overnight transition (although the company has already rekindled some of its retailer relationships), but there's the world-class brand to lean on in the meantime.
Nike's brand value was estimated at over $53 billion in 2023, more than three times the value of its biggest competitor, Adidas. Don't underestimate the leeway this provides.
Image source: Statista.
With the change of leadership and an above-average dividend yield, Nike should be able to obtain some breathing space from investors. It has the pricing power to keep its financials healthy and the consumer base to help provide a solid foundation while it corrects its mistakes.
Running shoes are booming -- Nike is not
Howard Smith (Bear): There's no question that Nike is an iconic brand. People all over recognize the "swoosh" logo made famous by NBA legend Michael Jordan and other brand ambassadors. But lately, the business hasn't been flying as high as Jordan is in his famous dunking pose.
In fact, its stock's returns have badly lagged the S&P 500 index for years. Since Nike last split its stock -- 2-for-1 on Dec. 24, 2015 -- its total return (including dividends) is 41% compared to the index at about 220%.
Of course, consumers can be fickle, fashion trends ebb and flow, and companies can recover from errors. But what's wrong with Nike isn't something that the company itself can turn around easily. It does recognize the need for a change and announced it would be replacing its CEO next month. Meanwhile, innovative new brands have taken hold with consumers.
Yet, smaller competitors like Deckers Outdoor (DECK 2.83%) and On Holding (ONON -0.67%) have been outgrowing Nike for several years now. The popularity of Deckers' Hoka brand and On's athletic shoes have soared. As can be seen below, revenue growth on a trailing-12-month basis for both of those companies has dwarfed that of Nike over the past three years.
NKE revenue (TTM) data by YCharts.
It's true that Nike is a much larger company than those competitors, making it harder for it to grow quickly off a much bigger revenue base. But the point is that the athletic shoe market is booming right now, and Nike's business is not. In the U.S. alone, the running shoe market is expected to keep growing for at least the next four years.
Image source: Statista.
It remains to be seen what turnaround plan the incoming CEO might have in mind. Some investors might be content to collect the dividend while they wait. But for those looking for growth, Nike isn't the place to be.
