Nike’s well-known swoosh dips down and rips higher as you look from left to right but that’s the exact opposite of the share price action of late, which has been nothing but down. In the past month alone, it has fallen sharply by 20%.
That’s a disappointing correction for a company whose slogan “Just Do It” was inspired ironically by the final words of a death row inmate.
The slogan alone highlights Nike’s ability to find inspiration in the most unlikely places and it will be needed by management to find new levers to pull to power the share price higher again.
Nike Inc. (NYSE: NKE) has long been a staple in the portfolios of investors looking for stable, long-term growth. The leader in athletic footwear and apparel built something few sports brands can ever hope to achieve, a trusted brand.
Recent share price movements, however, have triggered a sharp decline in Nike’s stock price, raising concerns about its future prospects, so is it time to buy the dip?
Reasons for the Recent Downturn
The primary reason for Nike’s share price plunge over the past month has been attributable to a disappointing earnings report that failed to meet Wall Street’s expectations. Revenue targets fell short by 2.3%.
Still, the top line grew, albeit at a cost, and that was evident in margin compression, which Wall Street typically punishes because it means lower profits.
Nike reported that its gross margin fell by 300 basis points, primarily due to higher freight and logistics costs, as well as increased markdowns to clear excess inventory.
The inventory question has been looming large for the sneaker giant for some time, especially in North America. Management has been left with little alternative but to offer steep discounts, which has pressured profit margins.
In its earnings call, the top brass acknowledged that inventory levels were up by 44% year-over-year, forcing the company to adopt aggressive promotional strategies to clear the backlog.
The real fallout of all these initiatives is lower earnings, and that’s been a laser focus for investors who have dumped the stock.
Will It Get Better For Nike?
Where matters got worse for shareholders was when management guided weaker-than-expected forecasts for the upcoming quarters.
Whether it’s supply chain challenges, inflationary pressures, a slowdown in consumer spending, or indeed a combination of all three factors, the bottom line is looking a whole lot less rosy in coming quarters. As a result, investors didn’t wait around but decided to sell first, and watch how Nike does later.
It’s no surprise given all the attention it has received that persistent inflation has eroded consumers purchasing power, and led to reduced discretionary spending.
Given Nike’s reputation as a premium brand, it is more vulnerable to shifts in consumer behavior, especially when consumers prioritize essential goods over discretionary higher-priced athletic apparel and footwear.
Other Headwinds Loom Large
Beyond the core challenges in the business such as too much inventory, Nike has also got to contend with the strengthening of the US dollar that has negatively impacted Nike’s international revenue.
The strong dollar hurts Nike’s product demand because they are more expensive in foreign markets and reduce the value of overseas sales when converted back to US dollars. In analysts parlance, the result is a currency headwind.
It’s also notable that inflationary challenges for consumers also hurt Nike on the input side, or more particularly the constituents that go into making apparel and shoes. The costs the company incurs go up as raw materials prices rise.
Higher costs related to shipping and logistics also weigh heavily on the company. For investors, these are serious concerns because they are largely out of the company’s control yet impact Nike’s ability to meet consumer demand and result in higher operational expenses.
Will Nike Stock Rebound?
Nike’s stock is unlikely to rebound in the near-term because of a mix of disappointing earnings and future forecasts that are set to hurt profitability.
Over the past month, the share price decline has largely been the result of a mix of disappointing financial performance, inventory challenges, weak guidance, inflationary pressures, currency headwinds, supply chain disruptions, geopolitical tensions, and broader market sentiment.
With that said, there is a lot to like about Nike over the medium and long-term. For one, Nike pays a dividend of 1.97% and has a 22 year track record of increasing the payout, which now stands at $1.48 per share. It’s also maintained dividend payments for a full 41 years.
And even with the margin compression expected, there is no hint of profitability flipping from black to red anytime soon.
Technical analysts may also point to the fact that the RSI has hit oversold levels as hinting that a potential buying opportunity may be near. It’s likely too risky to bet on that fact alone, though, given the bearish sentiment of 13 analysts who collectively have lowered their earnings guidance for the upcoming quarter.
On the whole, analysts are bullish longer term with a $93.49 per share price target, which closely aligns with a discounted cash flow forecast analysis that puts fair value closer to $95 per share. Either way, that translates to serious upside for investors over the medium to long-term of around 26-28%.
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