The apparel industry is hypercompetitive and participants have to deal with boom and bust cycles, constant new entrants, and changing trends seemingly every year. One sports apparel company has developed a reputation for strong performance in this industry: Nike (NKE +0.57%). The owner of brands like its namesake, Jordan, and Converse attracts dominant mindshare among athletes and young consumers, leading to growing revenue year after year.
However, some investors are wondering if this reign of dominance is coming to an end. Nike stock is in one of its sharpest drawdowns ever, down 63% from all-time highs set in late 2021. After a burst of growth during the COVID-19 pandemic, Nike's revenue is falling in markets all across the world while competitors take market share. It just brought in a new CEO to help the brand recover, but the calendar year 2025 is shaping up to bring more bad financial news for investors.
Smart investors know that (potentially) temporary weakness for an otherwise strong company can turn into buying opportunities for those with a long-term mindset. Does that make now a good time to buy the dip on Nike stock?
Increasing competitive intensity
Last quarter, Nike's revenue fell 7% year over year in constant currency to $11.3 billion. Growth was weak across the board, with Nike North America revenue falling 4% year over year in the period. This comes in the face of other brands doing quite well in shoes and apparel at the moment. On Holding (ONON 0.03%) grew sales 40% year over year, Deckers Outdoor (DECK 0.56%) grew 17% year over year, and Lululemon Athletica (LULU +0.11%) grew revenue 14% year over year last quarter, all on a constant currency basis. Granted, all three of these competitors are much smaller than Nike, so year-over-year growth is easier. But Nike isn't even growing.
While these brands are not always direct competitors to Nike, customer overlap is high in most situations. If a customer is thinking about buying running shoes, they will consider Nike and the plethora of upstart brands now available to consumers. Nike's current position seems to be weakening, an example of the fickle nature of the apparel market and how its trends ebb and flow on a year-to-year basis.
These competition headwinds are showing up in Nike's bottom-line numbers. Excluding the pandemic, Nike's operating margin hit a 10-year low of 10.3% over the last 12 months. Earnings per share (EPS) in its most recent quarter is down over 20% from all-time highs. The company is in a tough spot, and this doesn't only mean in North America.
NYSE: NKE
Key Data Points
International woes
Breaking down its financials, it appears the company's most dire situation is internationally, especially in China. China and its 1.5 billion people constitute Nike's largest country of operations besides the United States, and it is not going well. In its most recently reported quarter, revenue in China fell 15% year over year and operating income fell a whopping 42%.
Domestic brands such as Anta have grown quickly in the nation, resonating much better with consumers than Nike. In fact, after years of monster growth, Nike's revenue in China peaked in 2021 at $8.3 billion and hit $7 billion over the past 12 months. Some of this is due to a huge decline in consumer spending in the nation -- which may recover eventually -- but a lot of the blame has to do with the brand losing share to local competitors.
Data by YCharts.
Can new management right the ship?
With all these struggles, Nike decided to bring in a new leader to manage the business in late 2024. His name is Elliott Hill, a Nike veteran who has worked at the company for over 30 years. Hill believes the brand needs to start innovating with product assortment again and refocus on marketing toward athletes, its bread-and-butter customers.
Hill seems like the perfect leader for this company. He knows the product intimately and has plenty of experience in the industry. Today, the stock trades at a trailing price-to-earnings ratio (P/E) of 21, close to its lowest level in the past 10 years. And this is with profit margins much lower than its long-term average.
Nike is set up to be a winning stock if it can snap this string of revenue and earnings declines. However, I am not certain this will occur. Nike is guiding for revenue declines next quarter topping 10%, all while its competitors will likely keep growing. It is smart for the company to focus on marketing to athletes, but that is not necessarily why it is losing share to Lululemon and On. These are lifestyle brands, not strictly for athletic performance.
Apparel is a tough market, one that Nike dominated for an impressively long period. But that does not make the company invincible. Despite its low P/E, I would stay away from Nike stock and not buy it for your portfolio today.
