While the broader U.S. equity markets have been strong in 2023, led by the rally in tech stocks, sneaker giant Nike (NKE) has lost over one-sixth of its market cap this year, and is the second worst-performing Dow Jones Industrial Average ($DOWI) constituent. Nike stock hit an all-time closing high over $173 in November 2021, but more recently fell to a two-year low of $82.22 in October 2022 - and it's still trading around 26% below its 52-week highs.
Nike is the most popular sneaker brand globally and is the market leader in the segment. The stock, meanwhile, has been out of favor with markets, as evidenced by its recent price action. While NKE's 30% decline in 2022 could be attributed to the weakness in broader markets, the shares have failed to recover in 2023, despite a wider rally in growth stocks – which, incidentally, Nike classifies itself as.
There are multiple reasons why Nike stock has underperformed in 2023. These include:
- Concerns linger over the near-term sales outlook for Nike amid the macroeconomic slowdown in the U.S. In August, Foot Locker (FL) and Dick’s Sporting Goods (DKS) – both of which are key Nike channel partners – not only missed revenue estimates, but also provided tepid guidance. Nike stock fell in sympathy as these companies provided a somber view of the U.S. consumer.
- The ongoing economic slowdown in China is not helping matters for Nike, as the mainland represents a major market for the Beaverton-headquartered company.
- Nike is also facing margin pressures, which is making markets apprehensive. On a related note, the company was also plagued by the inventory overhang that the retail industry grappled with amid a consumer spending pivot towards services.
All of that said, I believe the worst is over for Nike, and the stock looks like a good buy around current levels. Here’s why.
1. Nike’s Margins Are Expected to Improve
Nike expects revenues to rise in mid-single digits in fiscal year 2024, and forecasts that its gross margins will improve between 140-160 basis points during the year. The company has also somewhat addressed the inventory question; at the end of fiscal year 2023, inventory was flat in dollar terms, but fell in unit terms as compared to the previous fiscal year. Analysts predict a double-digit rise in Nike's per-share earnings in both the current and next fiscal years.
2. Nike’s Focus on Digital Sales Should Drive Profits
Nike has increased its focus on its own digital platform and retail channels, while lowering its dependence on wholesale channels – which invariably have lower margins. In fiscal year 2023, the digital channel accounted for 26% of its sales – over 2.5x its performance in fiscal year 2019.
During the fiscal Q4 earnings call, Nike’s CEO John Donahoe said that the company’s focus on its own sales channels has helped it understand customers better. He added, “This is translating into sustainable and profitable growth for Nike, and we believe this growth will only accelerate as we add new capabilities built to serve consumers at scale.”
3. The Jordan Brand Remains Quite Popular
The Jordan brand is among the core strengths of Nike, and the company believes that it is on track to become the second-largest footwear brand in North America. Management added that penetration of the premium brand is lower in international markets - a growth opportunity Nike intends to focus on.
4. The Health and Sports Market is Growing
There is growing interest in health and sports, and the Nike brand has a strong appeal - including among young consumers. Donahoe stressed during the fiscal Q4 earnings call, “We are blessed with structural tailwinds around an expanding definition of sport, particularly around health and wellness, and a related structural tailwind around this movement toward athleisure.”
5. Nike’s Valuations Look Reasonable Now
Nike stock now trades at a next 12-month (NTM) price-to-earnings multiple of 26.2x, which is a discount to its 5-year and 10-year multiples. The valuation multiples look quite reasonable now, and downside appears to be quite limited from these levels.
NKE Stock Forecast
Wall Street analysts rate Nike as a Moderate Buy. Of the 26 analysts covering the stock, 16 rate it as a Strong Buy while 3 call it a Moderate Buy. Six analysts rate Nike stock as a Hold, while 1 has assigned a Strong Sell rating.
Its mean target price of $131.27 is 35% above current prices. Incidentally, NKE trades below even its Street-low target price of $109.
UBS, which has a Street-high target price of $150 on Nike, believes the stock can double from these levels in the bull case. It believes that the company’s long-term margin targets that it provided in fiscal 2022 are still achievable despite the macroeconomic headwinds. In their note, UBS analysts said, "If Nike were to reach these targets by FY26, EPS could reach at least $6.50. This is more than 2x the $3.23 Nike earned in FY23. If the stock holds its P/E, then the stock could double.”
All said, Nike is among the most iconic brands globally - and while the stock has looked weak over the last couple of years, I believe structural margin improvement coupled with reasonable valuations make this growth company look like a value buy at current levels.
On the date of publication, Mohit Oberoi had a position in: NKE . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
