Activewear trendsetter NIKE, Inc. (NKE) is scheduled to unveil its fiscal third-quarter report after the market closes on Thursday, March 21, 2024. However, the anticipated results are likely to mirror the effects of reduced consumer demand for athletic apparel in the prevailing economic climate. So, I believe it's prudent to maintain a Hold stance on the stock for now. In this article, I will delve into the reasons behind this recommendation.
In the fiscal second quarter that ended on November 30, 2023, the company disclosed a total revenue of $13.39 billion, just below the estimated $13.43 billion. For the fiscal 2024 third quarter (ended February 2024), Street projects NKE’s EPS to drop 4.3% from the previous-year quarter to $0.76. It is also expected to report a marginal year-over-year decrease in its revenue of $12.29 billion.
The athleisure giant’s troubles started last year when it revised its annual sales forecast downward, citing cautious consumer spending, weaker online business performance, and increased promotions.
NKE's wholesale segment is under strain due to declining retailer orders and challenges in online sales. Retailers are also slashing prices on NKE sneakers twice as much in 2024 compared to two years prior, challenging the brand's pricing power amid fierce competition.
However, despite the hurdles, the company announced plans to cut supplies of certain product lines to manage costs and aims to achieve $2 billion in savings over three years through various measures including supply chain improvements and automation.
Taking a closer look at the broader sportswear and apparel sector in the US reveals a challenging landscape. Persistent low demand and surplus store inventory cast a shadow over the sector's prospects. Additionally, high interest and inflationary environments, which lead customers to scale back on spending, particularly on high-priced items, also challenge the sector.
The athletic apparel manufacturer's stock plunged 18% over the past three months but soared 3.5% over the past six months, closing the last trading session at $99.64. Further, the stock is currently trading below its 50-day and 200-day moving averages of $102.53 and $104.94, indicating a downtrend.
Let's examine the potential factors that might impact NKE's performance in the months ahead:
Job Cuts Amid Demand Dip
NKE plans to reduce its workforce by around 2%, affecting more than 1,600 jobs, to cut costs amid declining demand for its footwear. According to GlobalData managing director Neil Saunders, layoffs are a preemptive measure to address concerns about further softening demand.
Mixed Financials
During the fiscal second quarter that ended November 30, 2023, NKE’s revenues increased marginally year-over-year to $13.39 billion. Its gross profit grew 4.6% from the year-ago quarter to $5.97 billion. Its net income and earnings per common share rose 18.6% and 21.2% year-over-year to $1.58 billion and $1.03 per share.
However, as of November 30, 2023, the company’s total current assets dropped 10.3% year-over-year to $24.63 billion.
Solid Growth
NKE achieved impressive CAGRs of 10.5% for revenue and 10.2% for EBITDA over the past three years. During this period, the company's net income and earnings per share (EPS) demonstrated even more robust growth, with CAGRs of 23.3% and 24.5%, respectively.
Mixed Analyst Estimates
However, for the fiscal year ending May 2024, NKE’s revenue and EPS are projected to increase by 1.1% and 11.3%, respectively, from the previous year to $51.79 billion and $3.59.
Attractive Dividend
In February, NKE announced a quarterly cash dividend of $0.37 per share on its Class A and Class B common stock, which will be distributed to shareholders on April 1st, 2024.
Moreover, NKE has raised its dividend for eleven consecutive years. NKE’s annual dividend of $1.48 translates to a yield of 1.49% based on prevailing prices, higher than its four-year average dividend yield of 0.98%. The company’s dividend payments have grown at a CAGR of 10.9% over the past three years.
Elevated Valuation
In terms of forward non-GAAP P/E, NKE’s 27.72x is 77% higher than the 15.66x industry average. Its forward EV/Sales multiple of 2.96 is 138.7% higher than the 1.24 industry average. Moreover, the stock’s forward EV/EBITDA of 21.35x is 123.6% higher than the 9.55x industry average.
High Profitability
NKE’s trailing-12-month gross profit margin of 43.96% is 22% higher than the 36.04% industry average. Its trailing-12-month EBITDA margin of 13.23% is 21.8% higher than the 10.85% industry average. The stock’s trailing-12-month net income margin of 10.28% is 113.2% higher than the industry average of 4.82%.
POWR Ratings Show Uncertainty
NKE’s uncertain fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, translating to Neutral in our proprietary system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories.
NKE has a C grade for Sentiment, which is consistent with its mixed analyst expectations. It also has a C grade for Stability, in sync with its 24-month beta of 1.16. The stock’s mixed price performance over the past months aligns with its C grade for Momentum.
NKE is ranked #12 in the 34-stock Athletics & Recreation industry.
Beyond what is stated above, we have also allotted NKE grades for Growth, Value, and Quality. One can access all the NKE ratings here.
Bottom Line
Although Nike boasts a strong portfolio of brands and market dominance, dampened consumer spending on discretionary items in the U.S. could harm the company’s sales. Moreover, persistent low demand and excessive store inventory cast shadows on the athleisure industry's prospects.
Moreover, analysts’ projections for the fiscal third quarter suggest a year-over-year decline in revenue and EPS, which only exacerbates NKE’s bleak outlook.
Moreover, NKE’s elevated valuation, price performance downtrend, and high beta value paint an uncertain picture. While the renowned activewear retailer’s long-term growth looks bright, its short-term prospects appear less optimistic.
Therefore, ahead of its upcoming earnings release, it could be prudent to await a more opportune entry point in this athletic stock.
Stocks to Consider Instead of Nike, Inc. (NKE)
Given its uncertain short-term prospects, the odds of NKE outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three B-rated (Buy) stocks from the Athletics & Recreation industry instead:
Vista Outdoor Inc. (VSTO)
Gaia, Inc. (GAIA)
American Outdoor Brands, Inc. (AOUT)
For exploring more top rated athletic and recreation stocks, click here.
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NKE shares were trading at $99.39 per share on Monday afternoon, down $0.25 (-0.25%). Year-to-date, NKE has declined -8.13%, versus a 8.22% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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