Nike Faces Challenges but Remains a Value Pick Amid Market Struggles

In 2024, Nike (NYSE: NKE) has experienced a significant decline. The stock has plummeted 27.4%, contrasting sharply with a 26.8% gain for the S&P 500. The only company performing worse in the Dow Jones Industrial Average is Boeing, which is currently undergoing extensive restructuring to regain its footing. Despite this downturn, Nike continues to generate nearly record sales and earnings.

Investors may be puzzled by this stock decline. Nike’s shifting business model and changing investor expectations play a key role in this situation. Below, we explore Nike’s recent performance, potential recovery strategies, and why it still holds value in today’s market.

Image source: Getty Images.

Nike’s Strategic Shift Since 2017

Back in 2017, Nike made a significant decision to expand its direct-to-consumer sales. That fiscal year marked the first time Nike reported its brand sales in two separate categories: wholesale and direct-to-consumer, which was renamed Nike Direct in fiscal 2018. It’s important to note that Nike’s fiscal year concludes on the last Thursday in June.

Data source: Nike

The table illustrates that Nike Direct had consistently gained a larger share of Nike Brand Sales until fiscal 2024.

Nike Direct thrived during the COVID-19 pandemic, skyrocketing to an all-time high stock price of $179.10 per share on November 5, 2021. This situation mirrored that of Walt Disney, whose streaming service Disney+ helped boost the company even while parks and films struggled during the pandemic.

On the positive side, Nike Direct provides the company increased control over consumer relationships, leading to better engagement and more targeted promotions. However, it also risks cannibalizing Nike’s wholesale business and straining relationships with retail partners.

Once viewed as a shining element of Nike’s growth narrative, Nike Direct now faces a tough period. In the latest report for the first quarter of fiscal 2025, which ended August 31, revenue dropped 10% compared to the same quarter in fiscal 2024. Specifically, Nike Direct fell 12% while wholesale decreased by 7%. Notably, sales at Nike stores rose by 1%, but Nike Digital saw a decline of 20%, with a projection of double-digit declines for the entire fiscal year. This shift means that what was once the company’s strongest area is now a significant concern for long-term growth.

Leadership challenges further complicate matters. The new CEO assumed responsibilities on October 14, making the upcoming second-quarter fiscal 2025 earnings call a crucial opportunity for investors to learn about the new management’s strategy. Yet, translating plans into effective action will be key.

Nike’s Valuation Insights

Although Nike faces sales and operational challenges, it remains a formidable player in the market, especially as newer brands like On, Holding, and Deckers Outdoor’s Hoka grow in popularity. Yet, these struggles do not overshadow Nike’s profitability and strong brand standing.

The stock price is currently approaching an eight-year low, despite considerable growth in sales and earnings during that timeframe.

NKE data by YCharts

This downturn in stock price creates a more favorable valuation for investors. Analysts predict a decline in earnings over the next year in comparison to the previous year, resulting in a higher forward price-to-earnings (P/E) ratio than the current P/E. Nonetheless, this forward P/E remains below the median P/E from the past three to ten years, reflecting the market’s skepticism about Nike’s future prospects.

NKE PE Ratio data by YCharts

A reassuring aspect is Nike’s strong capital return program. Over the last decade, the company has increased its dividend by 186% and reduced its share count by 13.9%, allowing earnings per share to outpace net income growth. On November 14, Nike announced an 8% dividend increase, marking its 23rd consecutive year of raising dividends.

Such a significant increase during challenging times suggests management’s confidence in sustaining the dividend. A modest raise would have been more expected if the company were in severe trouble. Although with a yield of 2.1%, Nike may not appear as a high-yield stock, it can still represent a solid income investment.