Nike’s Stock Struggles Amid Market Challenges

Note: Nike’s FY’24 ended on May 31, 2024.

Nike (NYSE: NKE), a well-known brand in footwear, apparel, and equipment, has seen its stock drop 28% so far this year, while the S&P 500 has grown by 23% during the same timeframe. In comparison, Lululemon (NASDAQ: LULU), a fellow competitor, has also declined 27%. What’s driving this underperformance for Nike?

Quarterly Earnings Report Shows Mixed Results

On December 19, Nike’s stock was trading around $77 per share. The company reported its second-quarter earnings, which ended November 30, showing better-than-expected results. However, when compared to last year, both revenue and profits were down. Sales reached $12.35 billion, reflecting an 8% decline year-over-year. Net income was $1.16 billion, or 78 cents per share, compared to $1.58 billion, or $1.03 per share, from the previous year.

Challenges in the Marketplace

Nike is currently facing several challenges. Difficult economic conditions, inconsistent consumer behavior, and sluggish in-person shopping have all affected sales. In its second quarter, both store and online sales fell by 13%, while wholesale revenues dropped by 3%. Geographic sales also showed a downward trend: North America saw $5.2 billion in sales, down 8%; Europe, the Middle East, and Africa reported a 7% decrease to $3.3 billion; Asia Pacific and Latin America were down 3% to $1.7 billion; and China also faced an 8% decline, with sales totaling $1.7 billion.

Stock Performance Compared to Peers

Nike’s stock has underperformed the wider market over the last three years, recording returns of 19% in 2021, -29% in 2022, and -6% in 2023. This contrasts sharply with the Trefis High Quality (HQ) Portfolio, which consists of 30 stocks and has delivered consistent returns with lower volatility. Notably, the HQ Portfolio has outperformed the S&P 500 each year during that stretch.

Strategic Reevaluation and Forecasts

Nike’s earlier strategy focused heavily on increasing online sales through marketing and select wholesale partnerships. Now, the company is reassessing this plan, looking to streamline efforts that have drained resources. As it transitions into FY 2025, Nike aims to address sluggish sales across multiple brands.

Financial Margins and Future Outlook

The company’s margins have remained relatively stable, typical for a mature business. However, a steep discounting strategy has caused a 100 basis point decline in gross margin, settling at 43.6% in Q3. This was mainly due to increased discounts and a shift in selling channels, although lower input and logistics costs provided some relief. Despite these challenges, Nike retains considerable pricing power and can potentially offset low-margin promotional sales by focusing on higher-margin products in the long term. It’s worth noting that rival Lululemon maintains gross margins around 59% (Q3 2024).

Revised Revenue and Valuation Prediction

Looking ahead, analysts predict Nike’s revenues for fiscal year 2025 will total $46.5 billion, down 9% from the previous year. Earnings per share (EPS) are expected to be $2.62. Based on these new figures, Nike’s valuation has been adjusted to $80 per share, reflecting a P/E multiple of 30.4 for FY 2025—this represents a nearly 5% increase from the stock’s current price as of December 19.

Comparative Performance with Peers

To further assess Nike’s standing, it is beneficial to compare it against its industry peers on various financial metrics. This examination provides valuable insights into how similar companies are performing.

[1] Returns as of 12/20/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.