Nike Stock (NYSE:NKE)
Nike (NYSE:NKE) is an iconic brand that will continue to perform well, but given its current valuation, I’d rather be a new buyer on a price drop.
Company Information
NKE creates and sells sports footwear, clothing, equipment, and accessories. It is the world’s leading seller of athletic footwear and apparel. Its footwear and gear are primarily intended for athletic use, yet they are frequently worn for casual purposes. It also sells clothes featuring the logos of professional and college sports teams.
The company sells its items under both its own brand and the Jordan Brand. The Jordan Brand, named after basketball player Michael Jordan, primarily distributes basketball-themed footwear and products under the Jumpman trademark.
Converse, which focuses on casual footwear and clothes, is also owned by NKE. Converse, Chuck Taylor, All-Star, One Star, Star Chevron, and Jack Purcell are among the brands sold by the subsidiary.
Almost all of NKE’s products are made by third parties outside of the United States. The company offers its items through the wholesale channel, its own stores, and online.
Threats and Opportunities
Looking at NKE’s geographic performance for the current fiscal year, China is the one place that has struggled. Covid lock-downs have had an impact on the company’s business in the country in recent years, with sales down -9% (or 2% ex currency) this fiscal year through nine months and -9% (or -13% ex currency) in fiscal 2022. However, before the arrival of Covid, China was NKE’s primary growth market.
As a result, reopening China represents a significant opportunity for the brand. The Chinese consumer is a brand aficionado, and the country has a thriving basketball culture, which fits right into NKE’s wheelhouse. NKE should benefit much when China Covid restrictions are eliminated and people return to normal life and athletics.
On the company’s third-quarter earnings call, CEO John Donahoe stated of China:
“And our brand strength, I think Matt mentioned this in his remarks, is growing. We’re the #1 cool and favorite brand. That gap widened in Q3 in Beijing. And it’s an environment where 6,000 mono-brand stores are a real advantage. And so we’re going to continue to invest in China for China. We have a great team there. We were delighted that they were able to come — we got to see them in person for the first time this quarter in 3 years, and they are very optimistic and excited about our future. We’re building, as you talk about hyperlocal product and storytelling ability. And that enables us to — for the first time, we have locally driven apps there and our ability to do rapid storytelling there. And our tech stack is increasingly China for China. So there’s really not been a time when we can serve consumers in China in a more agile and personalized way. And that is helping our competitive position in China. So we’re very focused on it and very — feel very good about our momentum.”
While China represents a significant opportunity for Nike, it also carries significant risks. Political tensions between the United States and China have been escalating, raising the possibility of a backlash against American brands. Meanwhile, competition from local competitors has grown. In 2022, Anta sales surpassed NKE, while other brands such as Li-Ning and Xtep are also gaining popularity. NKE remains the market’s second-largest company, with a 15% market share.
Having said that, I believe the opportunity in China now outweighs the danger as the country re-opens. Spending in the country is increasing, particularly for high-end goods. As a result, I believe the opportunity should outweigh the competition’s dangers.
DTC (direct-to-consumer) expansion remains another area of opportunity for NKE, as these sales tend to be higher margins. NKE is particularly focused on digital, where the company is spending to assist boost user engagement and sales growth. However, the corporation hasn’t forgotten about its wholesale partners and has even deepened ties with DICK’S Sporting Goods (NYSE:DKS), with whom it has consolidated loyalty programs.
Another NKE trademark is driving innovation and new product debuts. NKE is also the undisputed leader in celebrity athlete endorsements and spokesmen. NKE is a marketing machine that continues to employ technology to drive individualized product suggestions via its app and e-commerce businesses.
When it comes to hazards, NKE is now struggling with inventory problems. This began to appear for the company last fall and has been a typical industry issue, as many merchants over-ordered goods due to previous supply chain problems. While this is an NKE issue, they are attempting to resolve it, and it was not specific to them. However, this is not the first time NKE has experienced inventory problems, so there is a risk. Excess inventory usually results in greater markdowns and lower profits, which is a double whammy.
NKE is likewise not immune to a downturn. Given the brand’s prominence, I don’t believe sales would fall off a cliff, but growth might potentially stop or turn negative if the economy falters. Given the company’s scale, it would almost likely have an impact.
NKE, like other garment companies, may bear some fashion-related risk, though to a lesser level than most. If another brand acquires traction, it will very surely have an influence on the corporation, both in the United States and internationally.
Valuation
Nike stock is now trading at less than 20.4 times the consensus EBITDA of $8.27 billion for FY2024 (ending May) and 17.3 times the consensus EBITDA of $9.73 billion for FY2025.
It trades at a forward P/E of 27x the $4.03 expectation for FY24 and approximately 23x the $4.77 consensus for FY25.
Revenue is predicted to fall 9% in FY24 before rising 7% in FY25.
NKE trades at a significant premium to its peer group. The stock, on the other hand, has historically traded at a high multiple.
Conclusion
Nike is a well-known company that continues to thrive. While it is now battling with inventory challenges, it appears to be managing the situation well and should be in a solid position soon. Meanwhile, the company should profit from a re-opened China, which was a growth driver prior to Covid.
When it comes to NKE, the main concern is usually value. The company is rarely inexpensive and trades at a significant premium to its peers. However, the company’s operational performance and long-term brand power combine to justify its valuation.
NKE will continue to be a winner in the long run. Given the status of the economy, it is generally preferable to be a little more opportunistic for new money purchasers. As a result, I consider Nike stock a strong “Hold,” and would look to buy or add shares on any dip.
Featured Image: Pexels @ Aman Jakhar
