Despite its dominance in the athletic shoe and apparel industry, Nike (NYSE:NKE) has seen its share prices drop by over 30% in the last 12 months.
A combination of headwinds and lackluster financials has caused NKE’s selloff, leaving investors to wonder whether the hard times are behind Nike or if the company is still primed for further downward price action.
Is Nike’s bad news fully priced in, and can the company bounce back from the difficulties it has experienced over the past year?
Why Nike Has Been Selling Off
You don’t need to look too far to see why Nike has been on the chopping block because the revenues tell the tale. The top line has been on the slide for a few years and, in the most recent quarter, management reported a much lower revenue figure than expected of just $11.3 billion.
The bad news was dispersed across business segments with Nike’s wholesale revenue falling by 7% and direct-to-consumer revenues were down 12%. Gross margin also fell by 3.3%.
Both higher input costs and higher discounts required to induce consumers to buy contributed to these less-than-appealing results.
Among shareholders, a rumbling of concerns have spread that the prized moat is under threat too. By focusing on its direct-to-consumer sales, bears argue that Nike has allowed competitors to seize shelf space at other retailers and increase their visibility to consumers.
While the direct-to-consumer gambit undoubtedly raised margins and powered growth at Nike for a time, it may well have created an opportunity for rivals who would otherwise have struggled against the apparel giant.
Where Does Nike Trade Now?
After its extremely poor share price action during the past year, NKE appears to have settled into a reasonable but perhaps not undervalued price range. The stock currently trades at 21.9 times earnings, 2.1 times sales and 7.0 times book value.
Given that the S&P 500 overall is trading at about 27 times earnings, Nike is trading at a fairly decent discount to the broader market.
That sentiment, however, may not hold among institutional investors. Over the last six months, institutions have sold about twice what they’ve bought in NKE.
What About the Nike Dividend?
Another facet of NKE that’s worth taking into consideration is its dividend. At the moment, the stock is yielding about 2.3%, substantially above the average yield of stocks in the S&P 500.
It’s encouraging to note that the payout ratio is only 37.2%, meaning that Nike’s dividend is likely still fairly safe and that management still has plenty of room to raise it in coming years.
Nike has also been increasing its dividend for over 20 years, and recent years have seen a fairly brisk dividend growth rate.
Over the past three years, Nike has raised its payout at an annualized rate of 9.9%. Although the growth rate in the next few years is expected to be substantially lower, the company’s track record of quickly returning cash to shareholders through distributions remains appealing to income and dividend growth investors.
Nike Moat Fears Are Overblown
Given Nike’s falling revenues, it’s far from difficult to understand why many investors have lost confidence in the company. Nike, however, hopes to turn its embattled business around with its new “Win Now” strategy.
Under this strategy, the company plans to release new and updated products with a focus on the valuable US, UK and Chinese markets. These products will target runners, basketball and football players, as well as consumers looking for high-end training and sportswear.
This strategy is the signature policy of new CEO Elliott Hill, who came on board late last year to guide the company through a hopeful restoration.
In addition to the renewed sales and product strategy, reports of the death of Nike’s moat are premature. While letting its sales through third-party retailers lapse to focus closely on direct-to-consumer sales may have been a mistake that let some competition in the door, Nike retains a rather strong brand advantage.
Nike remains an undisputed leader among athletic apparel makers and consumers still have a strong affinity for the brand. As such, the company likely still has a good opportunity to turn itself around.
Will Nike Stock Recover?
Even after a period of dismal reports, analysts are still fairly optimistic about where Nike goes from here. The average price target for NKE shares right now is $81.39, a gain of almost 24% from current prices.
There’s little doubt that Nike has justified the selloff of the last year through its poor reports. Times ahead are likely to be difficult if consumer spending on branded sportswear dips as expected.
Given that Nike’s shoes are manufactured at contract factories in Southeast Asia, the current administration’s new tariffs could also put additional pressure on the company by further raising its costs.
With all of this said, Nike remains an incredibly powerful brand, and management’s plan to revive the business could still pan out. With shares trading well below the S&P average and a high dividend yield to deliver more stable returns for investors, the stock is a long way from being unattractive.
At today’s prices, Nike’s bad news seems to be more or less priced in. If management can return the company to growth, the stock could rally and deliver returns close to the analyst predictions. Even with a more modest rally, investors have a chance to buy a long-term compounder during a down period while accessing an attractive dividend in the process. So, while Nike carries a decently high level of risk, it’s a company that could be worth buying or holding as it attempts to navigate its recovery.
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.
