How Does The Economy Affect Nike?

U.S. consumer spending has turned tepid due to high prices and elevated interest rates. Businesses have also become cautious with company expenditures.

However, the situation could pivot sharply if the Fed enacts a rate cut. Inflation cooled in June for the third straight month, which might induce the Fed to return to its tight monetary policy.

For businesses that rely on consumer discretionary spending, the future may be a bit brighter. After all, while the The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is up 14.1% for the year, the gains are largely attributed to big tech leading the way, but that may be about to change.

NIKE (NYSE:NKE)

How does the economy affect Nike? A strong economy correlates with higher consumer spending that benefits Nike stock.

One of the biggest sports apparel retailers, Nike has for years been a brand leader in footwear apparel.

It’s hard to imagine this global leader began when Phil Knight started selling shoes from the trunk of his car but Nike has indeed proven to be able to withstand the whims of markets and economic booms and busts alike.

In spite of its long-term success, however, NKE share price has been struggling and fallen by 30% year-to-date, close to a 52-week low.

Recently, an insider shared his views on why the stock is down. A primary reason is that Nike shifted its marketing budget away from brand advertising to more algorithmic approaches with the intention of better understanding where it was generating an ROI.

Epic post on how Nike lost $25B in a day by trying to make everything data-driven:

“Nike invested billions into something that was less effective but easier to measure vs something that was more effective but less easy to measure.

In conclusion: an impressive waste of money.” pic.twitter.com/YyLH98B0eH

— Peter Yang (@petergyang) July 30, 2024

In Nike’s last reported fiscal year that ended in May, the company’s revenue growth was flat, coming in at $51.36 billion, compared to the previous year.

This was the first fiscal year after the 2020-21 downturn that Nike has not reported a significant year-over-year increase in its top line. Nevertheless, the company reported handsome profits of $5.70 billion.

Nike is trying to manage the current uncertain macroeconomic backdrop, including a notable decline in brick-and-mortar sales from China and a slowdown in digital sales. For the first quarter of fiscal 2025, revenue is expected to be down approximately 10%. On the bright side, the company has sufficient cash to keep its buybacks and dividends supported.

It last paid a quarterly dividend of $0.370 per share in July. The annual dividend of $1.48 yields 2.01% at prevailing prices, with a healthy payout ratio of 38.05%. Despite the selloff, Nike’s share price is trading at 22.73x its forward non-GAAP earnings. 

On a positive note, analysts as a whole see upside to $92.58 per share, though the range of price forecasts is wide from $60 to $124 across the 33 providing research coverage.

Nike isn’t the only major consumer brand with serious exposure to economic swings, though, and another favorite is Starbucks.

Starbucks (NASDAQ:SBUX)

Undoubtedly the biggest specialty coffee retailer in the world, Starbucks now operates across 86 markets globally.

As of March 31, 2024, the company had more than 38,900 company-operated and licensed stores, reflecting an increase of 6% from the prior year. And just like Nike, Starbucks has been on a downward slide this year with SBUX share price falling 18.9% year-to-date.

The company faces a challenging economic environment, which has culminated in softening consumer demand. Adding fuel to the fire, persistent inflation and international tensions have created headwinds. The effect was seen in its second-quarter results ending March 2024.

In the last reported quarter, revenues fell by 2% from the prior year’s period to $8.56 billion. The company cited lower comparable store sales, which declined by 4%, primarily driven by a 3% decline in the U.S. market and a 6% decline in international markets.

In addition, Starbucks faced criticism last year due to its supposed stance on the Middle Eastern crisis.

Looking ahead, Starbucks has forecasted a tough environment into the second half of the fiscal year. It’s trying to leverage its “Triple Shot Reinvention” strategy to achieve long-term growth, but results remain to be seen.

On the other hand, shareholder returns have not been significantly affected. Since its initiation in 2010, Starbucks’ dividends have been stable and growing.

The annual payout of $2.28 yields 3.03%, which is higher than the four-year average yield of 2.03%. 

Analysts view the stock favorably with upside to $87.32 per share and a range that spans from $77 per share to $108 per share.

Home Depot (NYSE:HD)

The world’s largest home improvement retailer, operating in more than 2,300 stores across North America, is also seeing a slowdown due to the current macroeconomic backdrop. Home Depot’s stock is up 5% for the year and that slugging performance represents substantial underperformance relative to the major market averages.

One reason is that home sales have hit a low due to higher interest rates and steep costs, which also slows down remodeling and home improvement projects. For instance, home renovation spending is expected to decrease from $481 billion in 2023 to $450 billion in 2024.

For the first quarter of fiscal 2024, the company reported gaining market share in spite of the financials sliding backwards, highlighting the challenges for the market as a whole.

Net sales declined by 2.3% from the prior year’s period to $36.42 billion, while net earnings on a GAAP basis contracted by 7% to $3.60 billion. The company has cited a delayed start to spring and softer demand for larger discretionary projects.

On the other hand, Home Depot has maintained its longstanding dividend payouts. The HD annual dividend of $9.00 yields 2.49% at the current price level. It has a payout ratio of 57.1%, which means Home Depot pays out more than half its earnings as dividends.

Looking ahead, the company is targeting a greater share of the residential construction market. It has recognized this opportunity as an approximately $250 billion addressable market. For this fiscal year, management has largely provided upbeat forecasts, but time will tell.

From an analysts perspective, the share price has potential to $383 per share.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.