Sometimes iconic companies go through a rough patch -- Apple nearly going bankrupt in the late 1990s is perhaps the most extreme example. More recently, Netflix stock dropped to a low of $166 per share in 2022 after increased competition led to subscriber losses, and Amazon's stock dipped under $82 per share at the start of 2023, when growth in AWS slowed.
Both stocks skyrocketed after ironing out the issues.
Nike (NKE -0.97%) is currently experiencing a rough patch of its own. The stock is 66% off its 2022 high due to declining revenue. Tariffs, plunging consumer sentiment, and some anti-American sentiment regarding products internationally are thorns in Nike's side right now, but these are likely to subside in the long run. Nike is also profitable, cash flow positive, and on sound financial footing, paying a quality dividend yielding 2.6%. The time to buy this beaten-down stock could be now.
The challenges and the plan
Nike faces several challenges after some recent missteps by the company. The company is criticised for its lack of innovation and overreliance on popular legacy sneakers. Meanwhile, competition in the space is fierce. According to CEO Elliott Hill, product innovation is a major priority now. The company will reduce the inventory of its older models and introduce new products. One example is the high-performance Pagasus Premium shoe for runners. The initiative will be a challenge as Nike needs to create new products that sneaker lovers will gravitate to and market them effectively. Fortunately, Nike has extensive experience and a strong, long-term track record of success.
Image source: Getty Images.
Nike also overemphasized selling directly to consumers while neglecting retail partnerships. This reduced visibility and connection with customers. The consensus is that Nike vastly underestimated the value of retail shops. The CEO emphasized on the most recent earnings call that the company is reconnecting with its wholesalers, which should be a huge positive in the future.
Nike produces a significant portion of its products in China, and the country is also a key market in which the company aims to expand its sales. Unfortunately, tariffs and geopolitical angst hurt costs and sales. The good news is that both the U.S. and China have incentives to come to a trade agreement soon, and Nike is actively focused on promoting its brand to the Chinese people. This is a terrific market for growth if Nike gets it right.
Clearly, the challenges are significant; however, Nike remains an iconic brand with deep knowledge and deep pockets.
Here's some good news.
Despite the challenges, Nike is far from a distressed company. For the nine months ended February 28, 2025, the company's fiscal Q3 2025 sales were $35 billion, a 9% decrease. However, operating overhead expenses also decreased by 9%, and Nike posted $3 billion in net income, or $2.02 per share. Profits are down year-over-year, but Nike is still operating well in the black.
Cash flow from operations was also positive at $3.2 billion. Nike paid investors $1.7 billion in dividends, repurchased $2.8 billion of its common stock, and ended the quarter with $8.6 billion in cash, a decrease of just $359 million year over year. As mentioned above, the 2.6% forward-yielding dividend provides investors with an incentive to hold shares and patiently wait for a turnaround. Nike has ample cash and positive cash flow to continue its 23-year streak of dividend increases.
Nike's price-to-earnings ratio currently sits 50% off recent historical averages, as shown below.
NKE PE Ratio data by YCharts
The price-to-earnings ratio jumps to 30 on a forward basis; however, this is still below its historical average valuation. Also, it is based on analyst estimates that expect earnings to continue declining. If Nike makes headway on resolving its issues and becomes a turnaround story, the stock is significantly undervalued.
Nike will report Q4 fiscal 2025 earnings on June 26, and the market's immediate reaction is anyone's guess. It is wise for interested investors to keep some cash on the sidelines to take advantage of a dip in the stock price.
Nike's return to growth won't be easy, and may not be swift. However, the best time to buy a company is when everyone else runs away. Companies often go through rough patches; those that emerge stronger will provide shareholders with market-beating gains in the long run. Nike looks like one of these companies now.
