Nike Faces Challenges: Can the Iconic Brand Reclaim Its Glory?

Long-standing companies sometimes encounter hurdles. Distinguishing between a minor stumble and a lasting decline can be tricky. However, evaluating a company’s core fundamentals offers clarity.

This is especially true for consumer discretionary firms that must adapt to changing customer preferences. Nike (NYSE: NKE) was once the epitome of success, enjoying consistent sales and profit growth. Lately, however, it has stumbled into tougher times.

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Can Nike regain its previous momentum, or have its best days come to an end?

Image source: Getty Images.

The Declining Power of the Brand

Nike’s marketing featured star athletes, including basketball legend Michael Jordan, making its brand synonymous with success. Nearly every athlete wore Nike sneakers, contributing to a strong brand identity.

Footwear alone made up two-thirds of Nike’s $23.9 billion in revenue for the fiscal first half ending on Nov. 30, 2024. In addition to shoes, the company produces apparel and equipment, like bags and balls.

For an extended period, Nike flourished with impressive sales and profit growth. Recently, however, the tide has turned. The company’s fiscal second-quarter sales fell 9% after adjusting for foreign-currency exchange rates. Still, management increased marketing expenses by 1%. Despite cutting overhead costs, diluted earnings per share dropped by 24% to $0.78.

Several factors contribute to Nike’s declining revenue: broader economic pressures, a stagnation in product innovation, and heightened competition. Rivals like Deckers Outdoor’s Hoka brand and On Holding have successfully captured market share from Nike.

Rebuilding Customer Relationships

To combat these challenges, Nike rehired veteran Elliott Hill as president and CEO last October. One of his key strategies is to ramp up marketing and focus on developing new products, especially in the sports footwear and apparel categories, rather than trendy styles.

The new CEO is also prioritizing stronger relationships with retailers and intends to reduce the emphasis on Nike’s direct-to-consumer sales model. Returning to the company’s original strengths appears to be a sensible approach, as it was fundamental to past successes.

Despite these plans, Hill cautions that a turnaround won’t be swift. Increased investments in product innovation and marketing are likely to drive up costs. Meanwhile, there is no assurance that Nike will succeed in attracting back the customers it needs for sales growth—a considerable challenge ahead.

Evaluating Investment Decisions

Investors seem aware of Nike’s struggles. The stock has plunged nearly 32% over the last year, while the S&P 500 grew approximately 21% during the same period. The stock is now cheaper, trading at a price-to-earnings (P/E) ratio of 22, down from over 30 a year ago, while S&P 500 large-cap stocks have a P/E ratio of 30.

Long-term investors should proceed with caution. Although Nike’s reduced valuation may appear attractive, it reflects ongoing troubles in light of stiff competition.

There’s potential for Hill to revive sales and earnings, but investing now carries significant risk. It may be prudent to steer clear of Nike’s stock for the moment and monitor its progress. Should you witness improvements in sales alongside increased gross margins, it could indicate positive changes are underway.

Is Nike Stock a Smart Investment Today?

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Lawrence Rothman, CFA, holds no positions in any of the mentioned stocks. The Motley Fool has positions in and recommends Deckers Outdoor and Nike, and also recommends On Holding. Please refer to the Motley Fool’s disclosure policy for further details.

The views expressed here belong to the author and do not necessarily reflect the opinions of Nasdaq, Inc.