• Nike reported their fiscal Q2 ’25 financial results last Thursday night, December 19th, ’24. Guidance for the last two quarters of fiscal ’25 is tough, primarily due to inventory re-alignment.
• The best sign for the stock was that despite the tempered outlook and expected margin compression, the stock finished almost unchanged in trading Friday, December 20th, on nearly 3x average daily volume.
• The company’s negative EPS and revenue estimate revisions smack of analyst worry about longer-term consumer demand and the lack of innovation about the Nike product line.

Nike (NYSE:NKE) reported their fiscal Q2 ’25 financial results last Thursday night, December 19th, ’24, and despite the tough guidance for the last two quarters of fiscal ’25, primarily due to inventory re-alignment, the best sign for the stock was that despite the tempered outlook, and expected margin compression, the stock finished almost unchanged in trading Friday, December 20th, on nearly 3x average daily volume (33 million shares traded versus the 12 million average).

If readers would look at how Micron (MU) traded after Wednesday night’s fiscal Q1 ’25 earnings release and how FedEx (FDX) traded Friday, December 20th, stocks that don’t go down on bad news are as telling as stocks that drop sharply after a great quarterly report.

So much of trading and even the longer game of true investing is based on “expectations” around sentiment, around earnings, around management, and even around guidance, etc.

Nike peaked at $180 per share in November ’21 and is still well below the 50% decline mark, and just may be getting thoroughly washed out in terms of unanticipated bad news.

Here’s a quick rehash of Nike Q2 ’25 financial metrics:

• Revenue beat the estimate by 2% for the quarter, while EPS beat its consensus estimate by 24% (and operating income beat by 57%), as revenue fell 9% y-o-y (constant currency based), operating income fell 24% y-o-y and EPS also fell 24%.
• Gross and operating margins fell 100 bps and 240 bps y-o-y respectively in Q2 ’25. Much of this, Elliott Hill (the new Nike CEO) noted, would continue to pressure margins until Q4 ’25 or the May ’25 quarter end.
• Because Nike does not publish a cash flow statement with earnings, even though the rest of the world’s great brands do, i.e., Coca-Cola (KO), Apple (AAPL), Nvidia (NVDA), Tesla (TSLA), etc. it looks like Nike generated $500 million in free cash flow for fiscal Q2 ’25, up slightly from last quarter’s $274 million, and undoubtedly pressured by the inventory liquidation.

Note this: Nike’s operating income has fallen y-o-y for 10 of the last 13 quarters.

Comparing margin metrics when Nike was trading at $180 per share in late ’21 versus today’s margin metrics with the stock at $80 per share, here’s what’s happened to gross and operating margins since:

• Gross margin: Late ’21 average about 46.5%, versus today’s 43.6%
• Operating margin: Late ’21 average of about 15% versus today’s 11.20%
• Price to cash flow and free cash flow valuation in late ’21 of 38x and 40x, versus today’s P/CF and P/FCF valuation of 18x and 22x.
• Price-to-sales valuation today of 1.86x versus the late ’21 valuation of 4.86x.

Here’s the real problem though.

Nike EPS estimate revisions:

(Source: LSEG)

Have to be frank with readers and say right upfront, these are brutally ugly downward revisions to Nike EPS estimates for fiscal ’25, ’26 and ’27.

Doing the quick math, that’s a 25% one-time negative revision for fiscal ’25, a negative 24% revision for fiscal ’26, and a 15% negative revision for fiscal ’27.

That’s grim.

Nike revenue estimate revisions:

(Source: LSEG)

Just since 12/15/24, the fiscal ’25 revenue estimate has been revised lower by -3%, the fiscal ’26 estimate by -5%, and shockingly, the fiscal ’27 estimate by -6%.

Personally, I didn’t expect to see that since the main Nike problem today is still inventory, and – well – excess inventory, and you’d expect management to be able to bite the bullet, take the margin and cash flow hit and get the old product out the door.

These negative estimate revisions smack of analyst worry about longer-term consumer demand and the lack of innovation about the Nike product line.

Summary / conclusion

The price action in Nike’s stock last Friday, December 20th, ’24, despite the revenue and margin guidance, was actually encouraging, but I wasn’t prepared for the degree of downward revision to Nike EPS and revenue estimates for the rest of fiscal ’25 as well as fiscal ’26 and fiscal ’27.

Fiscal ’25 with two quarters remaining in the fiscal year now expects a 48% decline in EPS (for the full year) on an 8% revenue drop y-o-y.

This blog has modeled Nike EPS and revenue growth since 1992, and in the 33 years between fiscal ’92 and fiscal ’24, Nike has only seen 4 years of negative revenue growth y-o-y, and those were 1994 (-4%), 1999 (-8%, brown shoe craze was the reason), 2010 (-1%, assuming due to global slowdown post 2008), and 2020 (-4% Covid-driven).

The inventory liquidation will impact earnings, revenue and cash flow for the rest of fiscal ’25 (ends May 31) – that much was clear from Elliott Hill, Matt Friend (CFO) and the rest of the Nike team. Underneath all this inventory liquidation, Elliott needs to restore “Nike energy” to the brand and be innovative and create buzz around the fiscal 2026 product line, and judging by the tenor of the conference call notes, I thought Elliott Hill – like any good CEO – was hesitant to “overpromise” on that front.

The stock is down 60% from its November ’21 all-time high near $180-181. This correction is similar to the late 1990s “brown shoe craze” (sorry about the name, but that’s what it was called at the time as consumer shoe preferences shifted away from the Nike brand towards what were then mountain hiking boots and more non-athletic footwear).

Nike’s stock was under water from the late 1990s through 2003 when a number of issues internally were fixed, like the supply chain, an expansion of the Nike footwear brand, etc.

Technically, I’d prefer the stock to remain above the July ’24 near $70-71 and not trade through $70 on heavy volume. One technician that this blog follows thinks $60 is the ultimate technical support for Nike.

This blog has its biggest position in Nike in the last 15 years, the last year thanks to the much more reasonable valuation. It’s still not “absolutely,” but on a 25-year relative valuation measure, the stock sports a 4% free cash flow yield and a 2% dividend yield for the first time in years. Clients have cost basis positions between the $70s and the $125-ish range.

Morningstar puts a “fair value” on Nike around $115 per share, meaning the stock is thought to be undervalued by 33% as of Monday, December 23rd’s open.

Investors can expect the next two quarters to remain grim, thanks to inventory liquidation and a still-weak China. China revenue has fallen -4% and -8% the last two quarters, while China EBIT has fallen -4% and -27% the last two quarters. (China revenue is roughly 14% of Nike total, while China EBIT is 28% of Nike’s total EBIT in the last quarter.)

Some tax-loss selling may be done before year-end ’24 in taxable accounts, and some small allocations of Nike might be bought for those accounts, with the biggest loss just to reduce cost basis over time.

There is no question the stock price reaction to an ugly quarter is a positive. As old traders and portfolio managers say frequently, “price (action) is everything.”

Today, Nike will remain a longer-term position, for clients, but that could change quickly.

None of this is advice or a recommendation, but only an opinion. Performance is no guarantee of future results. This information may or may not be updated, and if updated, may not be done in a timely fashion. Investing can, and does, involve the loss of principal, even for short periods of time. Nike revenue and EPS estimates are sourced from LSEG.

Thanks for reading.

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

The post Nike Earnings Summary: Undervalued By 25-30%, But The Brand Has Dug Itself A Huge Hole appeared first on Up2info.com.

• NIKE stock is down 30% YTD and 56.75% off its all-time high, presenting a buying opportunity for patient investors believing in mean reversion.
• New CEO Elliott Hill emphasizes a pivot back to sports focus, reinvesting in brand storytelling, and rebuilding trust with wholesale partners.
• Despite recent underperformance, Nike’s solid balance sheet, 10-year high dividend yield, and low P/E ratio make it a strong buy for long-term investors.
• Risks include potential execution delays and higher-than-expected CAPEX, but the balance sheet strength and brand name support a positive outlook for NKE stock.

This is one for the patient

The last time I wrote about NIKE, Inc. (NYSE: NKE), the company had just gone through a massive drop and was about to transition to a new CEO, who later became Nike veteran Elliott Hill. The stock popped for a bit, Bill Ackman bought in [he just increased his stake, by the way], and all seemed hunky-dory.

Well, the “Street” ain’t happy yet, and luckily, I get a chance to buy in even cheaper than my original cost basis. This is for the patient and those that believe in mean reversion. I was patient with Disney (DIS), buying it in the $90s which, I believed, was the bottom. Nike’s bottom seems to be right around this $70/share point in my opinion. I believe Nike is another 2-3 year turnaround story worthy of a “strong buy.”

Last article

Since my last article, this has performed worse than the S&P 500 (SP500), which has been on a tear. It’s nice to find some Dow 30 components that are not up this year and see which ones are worthy of purchasing as the year ends. Nike is near the top of my list.

Nike stock year to date performance

Down -30% for the year, this stock has basically done the opposite of the broad US stock market. These are the charts I seek.

Off all-time high

-56.75% off the all-time high, we are now getting more than half off. Are investors really that right to be worried about On cloud and Hoka? In my last article, I noted my childhood experience where Fila, British Knights, Reebok pumps, and even Cross Colors gave the company a run for the money.

All were hybrid athletic sneakers trying to market as semi-luxury products, except for the Reebok pump of course [something Nike had been edging towards]. The further they got away from sports the more they seemed to fade. Nike is smart to pivot back to a sports focus.

Reflexive patterns

This pattern has actually gotten even better than the last time I covered Nike. The price over the last 10 years is now a lower growth rate than all 10-year profitability metrics. This topic is covered in both The Alchemy of Finance and One Up On Wall St. This is the point where exuberance has now fallen below reality, we might call this the exuberance/reality ratio, EX/RE maybe? This alone for believers in mean reversion is a bullish buy signal.

Latest earnings call and presentation

Some highlights from the latest earnings call with comments from new CEO Elliott Hill:

-I’ll start with a high-level observation. We lost our obsession with sport. Moving forward, we will lead with sport and put the athlete at the center of every decision.

-I also see that we’ve shifted investments away from creating demand for our brand to capturing demand through performance marketing for our digital business. We will reinvest in our brands to create stories that inspire and emotionally connect with our consumers during important sports moments and critical product launches.

-We’re also going to continue to be aggressive in sports marketing. In just the last 60 days, we’ve announced the re-signing of the NBA and the WNBA, the Brazil Football Confederation, FC Barcelona and last week, the NFL.

-The final action we prioritize is building back and earning the trust of our key wholesale partners. Some partners and channels feel we’ve turned our back on them and we stopped engaging consistently. I’ve connected with many of them directly. Ed and Lauren at Dick’s, Regis and Mike at JD Sports, More Elliott, Foot Locker, Heinrich at the Deichmann Group, Michael at Sports Direct, Mr. Yu at Top Sports, Mr. Yu and Mr. Wang from Kaohsiung and Juan Carlos at Enova Sport.

Quick observations from the New Nike CEO Elliott Hill. Hill was a 32-year executive with Nike and has seen the company grow from its humble roots to where we are today. He emphasizes that he knows and loves this company and brand like no one else. Throughout the opening salvo, he’s very critical of Nike’s internalization [focusing heavily on Nike stores and not wholesale partners] and sole focus on digitization with marketing dollars.

He vows to make better, more sport focused products going forward which is what Nike was known for. They had recently gotten a bit off track trying to become more of a luxury brand than a sport brand making partnerships with musical artists and other non-sport celebrities. Elliott is focused on the pivot back to being squarely focused on sports.

Nike did deliver a top and bottom beat, but the top-line is still lower year over year which was to be expected. The big problem here is what analysts took away from the earnings call and the re-organization of the company goals going forward. They believe it will hurt forward EPS estimates and many will start to be cut. While this may be true, this article will utilize existing data and estimates to draw up a valuation.

After all, we have over 70% of companies beating earnings estimates this year. Analyst estimates are basically “hope for the worst and expect the best” in many cases.

NKE stock valuation and future earnings expectations

In the case of slow growth established by Stalwarts, I like to use the Warren Buffett “Owner Earnings” discount model as a preference.

From Hagstrom’s books on Warren Buffett, net income is first adjusted to add back in depreciation and amortization, which is different from EBITDA, this still accounts for interest and taxes, two very real expenses to a business. Then you subtract capital expenditures. If capex is huge in comparison to D&A, the business will pencil out less valuable, if equal or close to it, then you have an efficiently run business.

The 10 year Treasury rate (US10Y), unless unreasonably low, is used as the discount rate. As of 12/20/2024, the current rate is 4.5%

2026 earnings expectations

• $.45 cent per share growth expected from 2025 to 2026.
• 19% growth rate.
• Final valuation multiplied times forward average analyst expected growth rate [X1.199].

All numbers in millions of USD TTM.

Click to enlarge

Again, this valuation does not consider anything about downward revisions to earnings estimates, and I do believe most companies in the S&P 500 will tend to beat. Therefore, if the Street was expecting 19% growth 2025-2026 and might shave -30% off estimates according to some recent analyst comments, then a beat to that would probably still leave us around this $73/ share number fair value if everything goes poorly.

Being able to buy the bottom of a historical Stalwart like this and sit around while I collect a 10-year-high dividend and allow Nike to buy back shares is fine by me.

As you can see, my $88 estimate falls right at the current average of Wall St. Therefore, I believe this price target is pretty decent, and we have a FWD dividend yield now sitting at 2%. This could easily lead to a 15-16% total return next year in the face of what some investment banks think will be a flat year. This is if things go well, of course.

Balance sheet

The balance sheet for Nike is solid. It meets all the criteria I look for in a good balance sheet:

• Cash and short-term investments exceed long-term debt.
• Long-term debt is only 1.25 X EBITDA, a great leverage ratio.
• The share count is falling.

I have no bones to pick with Nike’s balance sheet. It does not blow your socks off strong, but it definitely hits all the right notes.

Historical dividend and P/E

Then we come to history and mean reversion theory. We can see first off that the 1.99% trailing and 2% forward dividend yield is a 10-year-high. The P/E ratio is also a 10-year low. Again, for the patient who believes in the Nike brand name, this is a great place to sit and collect a decent check while the turnaround happens.

Risks and summary

I believe the main risk in this is not competition, it’s execution. Similar to Disney, this thesis could take more time to turn around than expected. It could also take more CAPEX than expected, which could hurt owner earnings should CAPEX start to be greater than non-cash add backs.

I believe this is the deal in consumer discretionary right now. Analysts and the Street all dislike it, but the underlying fundamentals while not great on a growth basis, my opinion is that the balance sheet shows strength. I would argue that the balance sheet is much stronger from the point of where Bob Iger had to take back Disney to turn it around, so Elliott already has an advantage there. If you are conservative going into 2025, like myself, I think this is a strong buy.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of NKE, SPY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The information provided in this article is for general informational purposes only and should not be considered as financial advice. The author is not a licensed financial advisor, Certified Public Accountant (CPA), or any other financial professional. The content presented in this article is based on the author's personal opinions, research, and experiences, and it may not be suitable for your specific financial situation or needs.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Nike Stock: Why Investors Should Still ‘Just Do It’ (Rating Upgrade) appeared first on Up2info.com.

• Nike’s stock has declined significantly, trading below pre-Covid levels, making it a poor investment for many who saw it as a safe-haven.
• Recent data shows lackluster Black Friday sales for Nike, with Academy Sports reporting a 2% decrease in footwear sales, including Nike products.
• In this article, I explain why I believe Nike’s upcoming results could be worse than anticipated.

Earnings season is winding down while the holiday shopping season is reaching its peak. At the crossroads between these two seasons, we find Nike (NYSE:NKE), a stock we all remember as one of the pandemic winners now trading at less than half the share price of the late-2021 peak. Nike is actually trading below its pre-COVID levels and has turned into a detrimental investment for many who thought they had taken hold of a safe haven, a strong franchise, and a company with an endurable moat.

I myself have held Nike in the past. I bought it in December 2022, at a share price of around $100. It was an initial buy that I planned to increase. I thought I was buying a true compounder that would soon have seen a turnaround. I thought 2022 was a bad year for Nike more because of a pullforward effect seen in 2021, rather than structural issues. Well, as my research and understanding of the company deepened, I understood the stock was a real battleground for bulls and bears. Bears, in particular, pointed out how Nike was struggling to grow its sales because of poor sales in China and rising competition from nimbler rivals. So, even though Nike keeps being the most valuable brand in foot apparel and sportswear, I kept gathering data that made me more and more cautious about Nike’s prospects. In particular, in March 2024 I realized Nike would have faced at least two more years of slow growth. This was particularly enhanced by Nike’s strategy to bet mainly on direct sales that freed up the shelf space of many sporting goods retailers that was quickly filled by Nike’s rivals.

Once the company announced it would change its CEO, the stock popped and I seized the opportunity to exit my position at a price of around $87. I took a small hit, but I wasn’t confident anymore in the company’s operations and outlook. Moreover, Nike’s valuation continued to be rather optimistic for a company expected to have flat to negative sales for at least two more fiscal years.

This doesn’t mean I stopped watching and monitoring it. After all, many things have developed so unfavorably for Nike that the turnaround is almost inevitable. Bill Ackman thinks so, and we know he piled into Nike during Q3.

As we prepare for Nike’s Q2 FY25 earnings, there are a few things we should keep in mind.

Let’s start with some data that were recently released.

Adobe, Mastercard, and Salesforce released Black Friday shopping data and we know that in the footwear and apparel category, Hoka and On were top sellers while lackluster activity was seen for Nike.

Recently, we listened to Academy Sports and Outdoor’s (ASO) earnings call. Although we know the retailer is facing some struggles concerning growth, what its management disclosed about Nike can be useful to our purpose of forecasting what Nike’s earnings report may look like. In fact, we heard Academy state that: “Footwear was our second best performing category, down 2%, driven by strength in key brands, such as Nike, Brooks, Sketchers, and Crocs”. So, even though this was a good result for Academy, we are still talking about a 2% decrease in sales and this doesn’t bode well for Nike.

On the other hand, it seems Nike is reversing its sales strategy and returning to occupying shelf space. In fact, in Q1 2025, Academy will have a big launch of an expanded offering of Nike’s product line in more than 140 stores.

After all, Nike admitted in its last earnings call that “retail sales underperformed our plan, including our wholesale partners, with slightly elevating marketplace inventories requiring higher levels of promotional activity in Q1 to drive conversion”. To address this issue, Nike gave some information about what we should expect from actions aiming to rebalance the business away from depending too much on classic footwear franchises:

So we are actively rebalancing product allocations to our highest traffic channel in order to maximize franchise health and full-price realization.

In the near-term, this will have implications for certain dimensions of our business. Our men’s and women’s lifestyle business was planned down double-digits in Q1, and we expect these declines to continue through the year. The Jordan brand was planned down double-digits this quarter, and we expect Jordan to be down at the same rate for fiscal ’25. And we expect NIKE Digital to decline double-digits in fiscal ’25 versus the prior year. All taken together, these trends drove a mid-single digit headwind on Q1 revenue.

Now, I believe this take implies noteworthy consequences. First of all, Nike wants to diversify from footwear. Some investors may cheer, but this means Nike is not as confident as before about its franchise in this category, which has traditionally been viewed as Nike’s stronghold. Secondly, we should not expect Nike’s turnaround to be happening anytime soon. We have at least two to three quarters of slower sales and decreasing revenues while Nike rebalances its product portfolio and its sales channels.

After all, Nike’s Q2 guidance was clear: sales should be down 8% to 10% YoY, with gross margins down by 150 bps because of higher promotions and channel mix headwinds. Moreover, Nike didn’t provide FY guidance, meaning it is quite careful about how this fiscal year could turn out. In fact, Matthew Friends, Nike’s CFO, did admit that the company’s revenue expectations have moderated. Surely, if during this upcoming earnings call, which reports Nike’s first six months, we don’t hear anything about the full-year guidance, we should start worrying.

By looking at Nike’s consensus EPS estimates since last February, it is immediately evident that analysts have significantly revised their earnings estimates downward.

But let’s start from the top line and see what Nike should be reporting in a few days.

First of all, a year ago Nike reported revenues of $13.4B. This was already a disappointing quarter because it reported a sales increase of just 0.5%. Well, this year we are expecting a 9% decrease so sales could come in around $12.2B.

A year ago, Nike reported a gross profit of $5.97B, a 44.6% gross profit margin. Nike said we should see a 150 bps deterioration, so we should expect Nike’s gross profit margin to be 43.1% or $5.25B.

Considering a 10% net income margin, Nike’s quarterly net income would be $1.34B. Divided by the 1.49B shares outstanding, we have an EPS estimate of $0.90. Now, given the data I have recalled coming from the ongoing shopping season, I believe Nike’s results will be worse than that. In particular, while I think Nike’s sales can be reasonably expected to be 10% lower YoY, I think a 150bps margin hit is too optimistic. The reason is simple: Nike is rebalancing its sales channel mix and its product mix, therefore we might see its sales mix as less favorable than anticipated in terms of margins. Moreover, I think Nike’s net income margin will also be below 10%.

So, this leads me to make a forecast that is below what we can infer from Nike’s guidance.

A 10% decrease in sales would have Nike report $12.05B in revenues and the gross profit margin I expect is more towards 42% than towards 43%. This means Nike’s gross profit should be $5.06B. With a net income margin of 8.5%, we would have the company’s net income to be around $1.03B. This makes me expect Nike’s EPS to be $0.69. The current consensus is $0.63 and this tells us how negatively Nike’s earnings are viewed.

Moreover, if Nike confirms what it has already disclosed about its FY25 and the hard path towards pushing sales up once again, we have many reasons to believe that at the end of its FY25 Nike’s EPS will be in the range between $2.65 and $2.80. This means the stock is trading at a fwd PE above 28.5 if we take the middle of the range as its expected earnings. No wonder, Seeking Alpha valuation grade is still a D-, suggesting the stock is still expensive.

Now, this is an expensive multiple for a stock that not only is seeing sluggish growth, but is also seeing a margin compression.

Of course, I am not saying Nike will go bankrupt. Its balance sheet is rock solid, with over $10.3B in cash and ST investments and an LT debt of $8B. It is also a highly profitable company that usually generates $2B in quarterly FCF. However part of Nike’s premium valuation comes from the pricing strength that it has usually shown. In the past quarter, because of its inventory clearing actions, Nike reported only $400M in operating cash and $120M in capex, meaning the company generated only $280M in FCF. If this trend goes on, Nike’s investors will have to expect very different FCF numbers from the past.

Moreover, Nike got investors used to gross margins above 44%. If the market starts thinking that Nike needs to further compress its margins to fight off competition, a rerating of the stock is probably due.

All in all, I would avoid buying the stock before earnings. I would also suggest dumping it before such a dangerous earnings call. As you know, I am no short-seller and I don’t short stocks. But I do sell them when they don’t meet my investing parameters anymore. Currently, though I love Nike’s products, I don’t see a favorable setup for the stock and I believe this earnings report will show a company that is still bleeding. Even in case you are thinking about a recovery play, as far as I see it there will be plenty of opportunity for at least a year to buy the stock at decent valuations.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Nike’s Q2 Earnings: I Expect The Margin Hit Will Be More Than 150bps appeared first on Up2info.com.

• Nike is up slightly, outperforming 9.4% following a Buy rating issued in early summer.
• The Company is scheduled to report earnings this week, with consensus expectations set relatively low.
• The increasing global popularity of American Football, coupled with an extended NFL contract, potentially adds a wildcard element for Nike.
• NKE still needs to demonstrate its ability to maintain and defend its significant margin in market leadership.
• With moderate payout ratios, market leader Nike positions itself as an income investment for a long-term dividend marathon.

After having left premium valuations behind earlier this year, NIKE, Inc. (NYSE:NKE) made its way back onto watchlists of value-seekers for the first time in years. Moreover, in my initial Seeking Alpha coverage this summer, the company made it to a personal Buy rating – whereupon I acted accordingly. Since then, a total return of 9.4% has been recorded.

Ahead of earnings this week, let us once again break down the challenges that Nike inevitably faces and weigh them against the current opportunities in the market. This article’s conclusion will be that Nike remains a counter-cyclical income idea, or in other words, a dividend play.

Market Leader Under Pressure

Below is a self-conducted study among a peer group of nine major global sports apparel companies, based on revenue data from Seeking Alpha. While this does not represent a comprehensive market share analysis, it highlights the main trends in market composition within the industry. The study displays the relative trailing twelve months (TTM) revenues of these companies within the peer group on a quarterly basis.

Over the observed 2.5-year period, the peer group’s combined revenues grew at an annual rate of 6%, driven primarily by the rise of smaller competitors, many of which demonstrated double-digit growth rates. In contrast, market leaders Nike and Adidas lagged behind, achieving only a 3% compound annual growth rate (CAGR).

The resulting relative market share losses for Nike and Adidas amounted to 3% annually (not percentage points), while the combined smaller peers increased their market share by 6% annually. To clarify the math: Nike’s below-average overall revenue CAGR of +3% is the result of a +6% market CAGR offset by a -3% annual market share loss (not percentage points).

Nike Remains US-Teens’ Top Clothing Brand

Initially, sentiment among U.S. teenagers averaging 16 years old toward Nike as their top footwear brand is also declining, reaching a 2.5-year low at 57% according to Piper Sandler data. Nevertheless, Nike remains the leading footwear brand by a significant margin. While momentum is not in Nike’s favor, this underscores the brand’s resilience at the top, despite facing challenges from rising competitors on all fronts. Converse, another brand under Nike’s umbrella, has seen an even more noticeable drop in popularity, although it recently still held third place. Meanwhile, Adidas is making a comeback.

Popularity for Nike as the top clothing brand remains strong among U.S. teenagers, holding steady at around one-third, despite a slight decline. Nike continues to resiliently maintain its position at the top in this category as well. Interestingly, Nike has consistently maintained its third-place ranking among U.S. teens’ top shopping websites, trailing only Amazon and Shein.

Riding Up The Globalization Of American Football

Nike has been partnering with the National Football League (NFL) since 2012 and recently extended their contract through 2038, which was originally set to expire in 2027. Among other things, this ensures that Nike remains the exclusive apparel provider for all 32 NFL teams. This contract extension is a ‘crucial catch’, given the enduring popularity of American football, which continues to grow not only in the United States but also globally. The Nike-NFL partnership aims for nothing less than to further expand the sport’s worldwide reach.

See below how average NFL viewership is trending upward, reaching a nine-year high in the current season. Internationally, Super Bowl LVIII in early 2024 experienced a 10% increase in viewership outside the U.S., with double-digit growth in most countries. Viewership of NFL Game Pass on DAZN, which facilitates international access to NFL games, surged by 61% during the week of the last Super Bowl. Securing the NFL partnership for another decade was therefore a crucial move in defending Nike’s market leadership and potentially regaining international market share.

Earnings Ahead

Despite once again missing revenue expectations in Q1 2025, and with analysts across the board revising EPS estimates for the upcoming quarter downward, the stock managed to hold its ground. Earnings estimates for FY 2025 through FY 2027 are now approximately 20-25% lower than they were during my initial Nike coverage in early summer. Reported revenues were down 9% overall, with above-average declines in the direct-to-consumer segment and Converse, partially offset by smaller declines in the wholesale segment.

Given the sharp downward revisions and the fact that the revenue miss was not as severe last quarter, combined with the stock holding steady despite the challenges, it seems we may have reached the bottom. This suggests that current estimates are highly pessimistic, which could set the stage for positive surprises. In a tech-driven market, where companies like Nvidia are experiencing the opposite trend of ever-increasing expectations that are becoming harder to surpass – and where lately there appears to be an upper ceiling for the stock price even when expectations are exceeded – I believe Nike has great potential for positive surprises. This makes it a more attractive risk-reward opportunity compared to some highly valued tech companies, in which I am invested as well, to avoid misunderstandings.

Dividends And Valuation

Although payout ratios have increased over time, it is expected to remain around a healthy 50%. Hence, despite all challenges, Nike remains a reliable dividend play. Valuation multiples around 20 for the next few years correspond to a 5% earnings yield, which I also deem fair for a market leader that I expect to find back to a growth path alongside the overall market. Nike, at its superior size and market position, is not expected to outperform competitors in terms of growth, but delivers stable shareholder returns at a fair valuation. Elevated forward P/Es over the next fiscal year are due to expected earnings contraction that might be too pessimistic, as argued earlier.

Ready To Run This Marathon

In summary, Nike may have been mistakenly valued as a high-growth stock in recent years. However, expecting dynamic growth from a market-leading position that is twice the size of its nearest competitors was unrealistic from the outset. As a result, Nike did not catch my attention in recent years until its valuation dropped to its current levels.

Nike’s primary objective should be to defend its leading position and pay out returns to its shareholders. This forms the foundation of the long-term investment case for Nike as an income-oriented play. Beyond that, the brand’s premium might eventually be reflected again in valuation multiples over the long run, potentially leading to relevant price gains as well. But as the company’s management themselves acknowledge, proofing the brand premium is a marathon, not a sprint.

On the risk side, it is worth noting that I have caught myself potentially being overly bullish or biased. For instance, if the NFL were expected to significantly contribute to a turnaround, why is Nike still in its current position despite American football’s growing popularity over the years? Thus far, the operating turnaround is yet to be proven.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of NKE either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Nike: Confidently Holding Through Earnings appeared first on Up2info.com.

• Nike has declined more than 50% since its peak in 2021 and is now trading at historically low multiple valuations, but the risk/reward is still not compelling enough.
• Nike’s brand power remains strong, but its decline in the “cool” factor and changing consumer preferences pose a challenge to regaining market dominance.
• Despite declining revenues, Nike remains profitable, with an A+ profitability rating, strong margins, and manageable debt levels.
• Nike’s total yield of 5.5% is attractive but not enough to offset valuation concerns and competitive risks.
• Nike is a hold due to its high valuation, uncertain growth prospects, and competitive challenges, but it remains a strong brand with potential for a turnaround.

Introduction

NIKE, Inc. (NYSE:NKE) has really crashed the past few years and now has a valuation significantly below historical multiples. Nike has had a significant premium on its underlying values, but for a good reason: Market leader, good growth, and brand power. This premium has fallen significantly because of several factors. The ones I believe had the most impact are harder competition because of lower barriers of entry, losing its “cool” factor, and rising interest and inflation, which is reducing disposable income. While disposable income is a cyclical factor beyond their control, competition is something they can address, and they have a great brand name that will help them going forward. Trends can change rapidly, so Nike has the potential to regain its ‘cool’ factor and that will help them to get back to stronger growth. However, I believe some of Nike’s current risks outweigh their possible potential. Therefore, I believe NIKE, Inc. is a HOLD and I will tell you why.

Business model

Nike is one of the world’s biggest brands, and their business model is not something I will go into too much detail about. Below is a depiction of Nike’s business model.

Nike’s biggest market by revenue is North America, Europe & the Middle East and Africa, Greater China, and Asia Pacific. I can see a relationship where their biggest markets are where they have higher disposable income.

What’s happened?

Nike has declined more than 50% since its peak in 2021. What has happened? Nike fell during 2022, like most companies did, but they didn’t manage to recover in 2023. Their growth has paused and lost approximately 1% in market share since 2023, but they are still by far the world leader in sportswear.

I believe there are several reasons why Nike has fallen so much, but I believe one of the main reasons is that Nike has lost some of its “cool” factor, and consumers are looking for different brands. And new competition is not hard to find these days. One of the reasons is that 3D printers have become more advanced and much cheaper, which makes it easier for new brands to start producing. The shoes can have a rather complex structure without having to cost significantly more. Portugal’s new “Shoe Valley” is also attracting luxury brands to make shoes and has made it easier for new brands. TikTok’s advanced algorithms also make it easier for consumers to find new brands and discover different companies, and with the internet, this is easier as they can sell directly to consumers without having to use traditional retail channels.

Both this year and last year, there have been stories about retailers selling Nike at discount due to lower demand. Since Nike is struggling, this could arguably be the ideal time for competitors to capitalize on Nike’s vulnerable position, which is what I believe we are currently seeing.

Additionally, Asia has had a quick rise in disposable income in the past years, which has been good for Nike, but as disposable income rises, more competition comes in to try to get a piece of the pie. A relatively new trend is called Guocha in China.

A term that translates to ‘national wave,’. It refers to a movement in China where consumers, particularly Millennials and Generation Z, show a strong preference for domestic brands and products that incorporate traditional Chinese culture and style”.

As people earn more money, I believe people seek different styles and different identities and try to become more individualistic, and with a quick rise in new brands around the world, this has made it a lot easier, and as Nike has lost some of its “cool factors,” it’s not helping them either, but I don’t believe all hope is lost for Nike. They have a lot of brand power; fashion and trends can change quickly, and Nike has managed to create unique brands and partnerships that have helped them. So they definitely have opportunities to come back stronger. In the past quarter, Nike appointed a new CEO, Elliott Hill, who has spent nearly his entire career at Nike, previously serving as President of Consumer & Marketplace as well as Sales & Geographies. His deep understanding of the company positions him to drive meaningful change, and with the right management decisions, I believe Nike can turn things around quickly.

Nike has managed to maintain consistent margins over the past year, indicating that its costs closely align with its revenue. Nike is still a very profitable company with an A+ Quant rating from Seeking Alpha, and they have managed to keep their profitability regardless of declining revenue growth.

Next week, Nike is set to release its latest quarterly report. The consensus estimate is an EPS of $0.64. The estimated EPS for 2025 is $2.75 and that is what I will use for my valuation later. It will be important to see if they manage to meet this estimate and what I will be looking for is any strategic plans for the future and what the newly appointed CEO will try to convey to the stakeholders about the current market or future plans. Will Nike try to be more efficient with new shoe developments? Are they going to invest more in R&D and try to take back their position as the most innovative player they once had? These are things some things I hope Nike will try to communicate going forward.

Outlook and growth opportunities

The global footwear market is expected to grow with a CAGR of 2.35% until 2029. Global sportswear demand, however, is expected to grow faster, with a CAGR of 4.68% between 2023 and 2030. So, I would assume that Nike’s growth rate could be anywhere between 3 and 4% over the next five years if these outlooks are right. I believe that the outlook is fair because GDP growth is expected to grow between 2.5% and 3% in the next couple of years, and there should be a positive correlation between the two.

According to analysts, Nike is expected to have a revenue CAGR of 6% after 2025, that’s more than the market is expected to grow each year. What does this mean? It means two things: Nike will get some sort of competitive edge compared to their competition, or the market will grow so much that Nike and all competitors will benefit from it. What could give the market such a boost? I believe lower interest rates and lower inflation could increase spending because it will impact disposable income; if this does indeed happen, it could increase spending worldwide. But you have to ask yourself what the chances are that Nike will achieve this growth. I myself believe it is more unlikely.

Valuation

Now, over to Nike’s valuation. Nike, in the past century, had a high valuation multiple. Over the past five years, Nike’s average valuation multiples include a PE ratio of 35x, a PB ratio of 13x, and a PS ratio of 3.78x. This is quite a high valuation and a significant premium on underlying value, but it has been deserved regarding the fact that Nike is the market leader, has had strong growth, and is a very strong brand. Nike’s valuations have been tumbling in the past years, but according to my calculations, they still have a significant premium.

According to my discounted EPS valuation, Nike’s fair value is closer to $65 per share. The valuation is calculated using EPS, so the growth rate is what, I believe, will be Nike’s average EPS growth rate. My valuation is based on three different scenarios: Base case, worst case, and best case. The worst case is based on no more than 2% growth in the first five years and 1% after that, and the base case is based on 3% growth in the next five years and 2% after that. The best case is based on 5% growth in the first five years and 4% after that. The growth rates are based on either analyst projections or the anticipated market growth over the next few years. The EPS I am using is the estimated 2025 EPS of $2.75.

Some might say I am pessimistic by using a 5% EPS growth rate for my best-case scenario in my valuation when the consensus projects over 10% growth rate for the next five years, but my preference for conservative valuations has proven effective so far.

Also, looking at the future P/E ratio using consensus earnings estimated, then Nike still looks expensive.

Dividends and buybacks

On the positive side, Nike currently offers a combined dividend and buyback yield of 5.5%, which is compelling. They are finally buying back stock at a historically low price, and it seems way more logical compared to their buybacks in 2021.

Financial health and risks

Nike has strong financial health, with a current debt of $9 billion and equity of almost $14 billion. Nike’s debt-to-equity ratio has risen in recent years, though it remains manageable. They currently have a negative net debt, with more cash and cash equivalents than debt.

In my view, Nike’s main risks going forward are tougher competition, premium valuation and a recession. A recession is generally not a good scenario for any company, but it will impact Nike significantly, as a recession will lower consumer spending.

A risk you have to take is the bet that they can make themselves “cool” again, and that management makes the right decisions, since they still have a significant premium compared to fair value according to my calculations, with a book/value 11x and forward PE ratio of 28x according to estimates.

Conclusion

So what is my final verdict? My view is that Nike is a hold. There are too many uncertainties regarding harder competition, lower barriers of entry and how Nike is viewed as less “cool”. According to my calculations, Nike still holds a significant premium compared to fair value and the risk/reward is still not good enough for me. I don’t believe you should buy a company because it is below historical averages unless it’s a cyclical company, and Nike is still expensive if they don’t manage to improve their sales and earnings.

I also believe that brand power can erode fast, but on the positive side I believe Nike can turn things around rather quickly if they manage to make their brand “cooler” again, but there is a growing number of new competitors, and it will be a tough road ahead.

Looking at Seeking Alpha’s Factor Grades, we can clearly see that Nike’s grades are poor, but they still have strong profitability and I believe Nike could pull themselves back to the top. However, I believe the best thing is to HOLD and wait out the situation because the risk/reward is still not good enough.

This is just my view, let me hear yours.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of NKE either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Nike: Why It’s Still Too Early To Invest appeared first on Up2info.com.

• Consumer discretionary stocks have struggled but are rebounding with recent FED rate cuts, with XLY outperforming SPY and DIA significantly.
• Nike, despite its brand dominance, has seen a 27% loss YTD, while Adidas has delivered a 24% gain, post-Yeezy settlement.
• Adidas shows stronger recent performance with increased sales, profits, and a promising turnaround plan, while Nike faces a challenging transition under new leadership.
• Both companies have similar valuations and debt metrics, but Adidas’ growth-oriented portfolio and current momentum make it a more compelling investment.

Consumer Discretionary stocks have been struggling over the last few years. With interest rates on the rise, consumers have been forced to tighten their belts, and directing their purchases towards more essential items.

As a result, revenues have been under pressure, and margins have dropped due to both higher costs and the need to cut prices to reduce inventories.

Investors have rotated out of the sector, as shown by the lagging share price growth of the sector ETF (XLY) compared to the Dow Jones (DIA) and S&P 500 (SPY).

However, in recent months, with the Fed shifting into a rate cutting cycle, and general signs of consumer lead economic resilience, consumer discretionary stocks have been playing catch up. Over the last three months, XLY has returned 27% vs 12% for SPY and 10.5% for DIA.

XLY outperformance has accelerated in the month since the U.S. Election, with XLY returning 14% in just the last month.

Today I want to zoom into a sub-segment of the consumer discretionary sector, the sports shoe and apparel segment. We are going to go head-to-head with two leading brands, Nike (NYSE:NKE) and Adidas (OTCQX:ADDYY).

Nike vs Adidas

Neither brand needs much of an introduction, being the two largest companies in the sector by revenue. Nike is the giant in the room, with more than double the revenues of Adidas. However, Adidas itself is twice the size of Puma, its nearest competitor.

In terms of brand value, Nike is the undisputed king, with an estimated brand value of $37bn, more than triple the estimated brand value of Adidas, which comes in at $11bn.

So Nike wins both in terms of sheer scale, but also in the critical field of brand recognition. But does that make it a better investment than Adidas today?

Let’s have a look at somehow the two businesses have been performing for investors.

Shareholder Returns

Over the long term, Nike has certainly delivered for shareholders, with a total return of 430% compared to just 314% for Adidas over 20 years.

However, over the last five years since the Covid era, relative performance has normalised. While neither has been a happy place to invest, along with the rest of the consumer discretionary space, Adidas has just pipped Nike to the post in terms of a slightly smaller drawdown.

One big factor in the Adidas relatively sharper decline from 2022 – 2023 could be the collaboration with controversial rapper Kanye West. They had a JV brand ‘Yeezy’.

West hit the headlines in 2022 due to some alleged anti-semitic comments. Adidas, as a German company, in an industry where brand matters first, was extremely sensitive to this. Although Adidas responded swiftly, the Yeezy settlement dragged on until earlier this year, when it was finally resolved, as reported here by the BBC.

While other factors are surely at play, Adidas has made a great comeback vs Nike since settling the case. In fact, year to date, Adidas shareholders have enjoyed a total return of 24%, compared to a 27% loss for Nike investors.

Revenues

In terms of overall sales, Adidas has had two distinct periods of under-performance. First was during Covid, in which Nike sales were impacted far less. This can be explained by the portfolio differences. Nike is more of a pure play sports brand, whereas Adidas combines sport with a stronger leisure footwear and apparel business. Post Covid Adidas recovered quickly until 2022 when sales dropped off again.

Net Income

A similar pattern emerges here, with Adidas net income growth outpacing Nike until Covid, recovering sharply, then falling off a cliff in 2022.

And just look at the recovery year to date:

Nike has stagnated, while Adidas has grown net income dramatically.

Most Recent Performance

Nike

Nike reports on a June 1st Financial Year. The most recent earnings release was on October 7th. This was the first earnings release under a new CEO, Elliott Hill.

The company is clearly struggling. Revenues for the latest quarter were down 10%, and while gross margins improved slightly, gross profits were down 8%.

Nike has been investing heavily in marketing, with a 15% increase in costs, while cutting overheads. The equation didn’t balance, with a 2% increase in SG&A.

Pre-Tax income was down 21%, and, to put the icing on the cake, the effective tax rate increased by 29% from 12% to 19.6%.

Net income was down 28%, and EPS down 26%.

The balance sheet grew overall by 3%, while long-term debt was reduced by 10% to $8bn.

On the conference call, guidance for the coming quarter showed little promise. Expectations were set for a continued 8-10% drop in sales, a flow through to net income, and a continued ‘high teens’ tax rate. All new CEOs like to set low expectations, and exceed them, but even accounting for this there seems little to cheer about.

The overwhelming message is of a business entering a turnaround.

Adidas

At Adidas, the picture is markedly different, as detailed in the results factsheet.

Net sales for the quarter were up 4% year-on-year. Gross profit increased by 18%. EBITDA increased 61%. The operating profit and net income increased by 4.5x and 6.5x, respectively.

Granted, the comparison was from a year in which Adidas was only marginally profitable, however, the turnaround at Adidas seems to be in.

Net Income was still just 3% of sales, whereas Nike’s net income to sales was over 8.6% for the quarter.

Clearly, this leaves a lot to be done by Adidas in terms of continued margin improvements.

Their shareholder presentation lays a roadmap to a 10% EBITDA to sales by 2026. This is via a combination of double-digit sales growth and reductions in the marketing budget and overheads to drive margins.

While these targets seem ambitious, it is encouraging to see how 2024 has been a year of consistent increased guidance from management.

Valuation

On a price to book value, the two are pretty close, with Nike’s valuation having been brought down to earth.

Price to Free Cash Flow shows a similar picture. They are neck and neck after the recent share price convergence.

Balance Sheet In terms of financial leverage, again, at current the pair are running neck and neck, as Adidas earnings improvements have converged the debt metric.

Conclusion

• Both Nike and Adidas have suffered from constrained consumer demand.
• Adidas shot a brand management ‘own goal’ with the Kayne West ‘Yeezy’ episode.
• Adidas has settled with West, and are well on the road to performance improvement.
• Nike is just entering a transition phase with a brand-new CEO.
• The share price momentum is in favour of Adidas.
• While Nike has a more valuable brand, Adidas arguably has a better growth oriented portfolio.
• Both have improving and acceptable debt metrics.
• While it is a close race, in this one my decision is in favour of Adidas, who seems to have a head start.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The author is not an investment advisor, and offers no advice. He shares his analysis solely for the interest of readers.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Nike Vs. Adidas: Which Will Put A Spring In Your Step? appeared first on Up2info.com.

• Nike is a dominant leader in the athletic footwear and apparel space generating high ROIC and outlier EBIT margins.
• The company trades at a discount to historical, peer and DCF multiples with aligned management at the helm.
• Per my analysis, Nike is a Strong Buy at current levels that could offer ~13%-15% CAGR within 3 years in addition to ~2% dividends.

Nike (NYSE:NKE) is a high ROIC business with sustainable competitive advantages trading at a fair price. The ownership, board and C-suite are aligned with strong incentives and skin-in-the-game. The company also has a simple and understandable capital allocation policy geared towards returning cash to shareholders. Despite near-term operational concerns, Nike is well-positioned for long-term outperformance on a go-forward basis. I recommend a strong buy for Nike at $65-$70 per share, targeting a price CAGR of ~13%-15% in 3 years.

Company Overview

Nike is an American athletic footwear and apparel corporation headquartered in Beaverton, OR. The company designs and markets athletic footwear, apparel, equipment, accessories, and services worldwide. Nike is the largest seller of athletic footwear and apparel in the world. The company sells its products through 2 channels: NIKE Direct (comprised of Nike-owned retail stores and its digital platforms), and wholesale accounts (comprised of independent distributors, licensees, and sales reps). As of May 2024, Nike had 79,400 employees, 8 US distribution centers, 68 international distribution centers, 377 US stores, and 668 international stores. The company also owns Converse and Jordan Brand.

Nike was founded by Phil Knight and Bill Bowerman in 1964 as “Blue Ribbons Sports”. Bowerman was a legendary University of Oregon track coach, and Knight was his runner/mentee. Blue Ribbons Sports was initially the exclusive distributor of Onitsuka Tiger shoes in certain US states, but gradually developed and sold its own Nike brand. For more information on Nike’s founding, please read Shoe Dog by Phil Knight, which was recommended by Warren Buffett.

Today, Nike generates sales of ~$50B and EBIT of ~$6B. It pays very little in taxes (~15%) using a complicated tax strategy called “offshoring” and R&D credits. The company generates 43% of sales in NA, 28% from EMEA, 15% in Greater China, and 14% in APLA. Wholesale is 56% of sales, while direct-to-consumer sales account for 44%. Nike remains a Shoe Dog, netting 68% of sales from footwear. The company is ranked 93rd in 2023’s Fortune 500.

For this report, I relied primarily on sources such as 10K, 10Qs, proxies, earnings transcripts, sells-side research, Balyasny AI, field research, Tegus transcripts, Reddit, LinkedIn, Nike’s website, news articles, YouTube videos, books on Nike, podcasts on the company, etc.

Good Business

ROIC: The best test of a business’s “moat” is its ability to maintain high ROIC over long periods. Nike reports its own estimates of ROIC in the 10K. The formula is the following:

NOPAT/(Total debt + Shareholder’s equity – Cash and equivalents and Short-term investments). Where total debt includes the following: 1) Current portion of long-term debt, 2) Notes Payable, 3) Current portion of operating lease liabilities, 4) Long-term debt and 5) Operating lease liabilities.

It’s good that management includes leases in the formula. I have no qualms over management-provided ROIC as it is calculated fairly:

Nike pays less taxes than the statutory rate (21%) due to the aforementioned “offshoring” strategies and R&D rebates. On a normalized tax basis, the company’s ROICs are still very high:

Peer ROIC: Nike’s competitors are gasping for air. The table below shows Nike vs peer ROIC calculated with the same ROIC formula. The large spread indicates Nike’s capital efficiency, driven by superior asset turnover and margins (more on this later):

Phantom Intangibles: Nike delivers long-term ROIC above the cost of capital due to the presence of “phantom” intangible assets. Accounting rules dictate that intangibles must be amortized overtime to capture asset/brand “depreciation”. Brand deterioration happens for most companies, but not Nike. I’d argue that brand value created from the ~$3M or so Nike spent on hiring Michael Jordan in the 80s did not depreciate but appreciated overtime. Today, the Jordan Brand does ~$7B in revenue and is one of the fastest growing Nike segments, increasing sales by 35% since 2022.

Jordan’s story is also an effective recruiting tool for Nike to sign on younger athletes aspiring to be like Mike. The Jordan legacy arguably allowed the company to sign 2 of the best NBA players of the 21st century, Kobe Bryant and LeBron James. Kobe is notably obsessed with Jordan, and there is an incredible article on how Nike signed rookie LeBron by leveraging “be like Mike”. Today, Nike is using the same tactic to lure top young players who idolize Kobe and LeBron, such as Jayson Tatum (loves Kobe, signed to the Jordan brand), Luka Doncic, and Zion Williamson.

Nike uses the same strategy in other sports. In soccer, the signing of Cristiano Ronaldo years ago has potentially led to deals with Kylian Mbappe and Erling Haaland, 2 top current players who were Ronaldo fans. Jordan/Ronaldo spending is among many other intangible assets Nike has invested in the past that is growing and unaccounted for on the balance sheet.

It is hard to ascertain a value for Nike’s phantom assets, but if we were to treat Nike as a normal business earning cost of capital returns (ROIC of 10%), we can find a normalized level of IC. Then, by finding the spread between normal and reported IC, we can estimate the value of the intangibles:

To triangulate, Statista shows the following values for Nike’s brand. Statista pulled these numbers from Brand Finance, a third-party brand consulting firm. The numbers are close. Truth is likely somewhere in the middle between Statista and spread.

In sum, Nike’s phantom intangible assets, unaccounted for on the balance sheet, allow it to reduce reported IC, which helps propel ROIC higher than that of peers and the cost of capital.

Margins: Nike has lower gross margins than peers, though high on an absolute basis. This is likely driven by Nike’s disproportionate revenue contribution from footwear (68%), which is lower GM than that of apparel. Adidas and Puma sell more apparel and accessories (~47% and ~43%, respectively), hence the higher GM. Seems fair, as it costs more to make shoes than shirts.

However, Nike’s operating margins are significantly higher than peers-what’s going on in the operating expense section? This is where Nike’s scale advantages come into play. Nike has a section in opex called “demand creation activities”, which is essentially the marketing budget. Demand creation typically runs at ~8%-10% of sales, or ~$4B-$5B annually.

Sports marketing has winner-take-all dynamics. Ask the layperson to name athletes they know of in various sports, and they could probably only recall 1-2 top players. Look no further than Instagram, where LeBron has ~13x the follower count of James Harden.

Top athletes like LeBron, Ronaldo, and Tiger Woods have a disproportionate share of “eyeballs” attached to them. Why? These athletes have a certain mystique to them either due to personality or play (or both), which allows them to access more screen time / social media followers, which drives more ad opportunities for their endorsers, which incentives endorsers to spend more on marketing them, which increases their mystique…the flywheel goes on and on:

Nike’s ~$4B-$5B annual marketing budget is the largest in sports, allowing it to lure the best athletes away from Adidas or Under Armour (marketing budget of ~$2.5B and ~$600M, respectively). Moreover, I’d argue that Nike’s marketing spend is also higher ROI than peers due to the pareto-distributed brand power the best athletes possess versus, say, the second or third best.

Financially, Nike’s marketing budget is a massive headwind for its peers’ margins. To compete with Nike on a commensurate level, Adidas needs to puke out ~$4B-$5B while spreading it across lower sales (~$24B instead of ~$50B; ~17%-21% instead of ~8%-10% of sales), which cannibalizes OPM.

Under ex-CEO John Donahoe, demand creation ticked lower to ~8% of sales. Nike is not a business with operating leverage. Instead of weakening the demand creation engine, I believe OPM improvements should come from trimming expenses (which is up since 2021) or boosting GPM via better pricing. For better pricing, Nike would need to launch new compelling products while halting dilution in product lines meant to be supply scarce. Easier said than done-we’ll see what new CEO Elliot Hill has in store for us.

Brand vs Product: I had a conversation with a friend on the differences between a brand and a product. A brand is more of an ecosystem that can be applied across various products. Think how Nike sells shoes but also sticks its logos on apps, clothes, headbands, TV ads, events, the Olympics, etc. On the other hand, a product is less comprehensive and is subject to fads. On and especially Hoka make good running shoes but lack an ecosystem where the brand can be leveraged across other products. This is obviously more anecdotal but an interesting thought, nonetheless.

Summary: Nike generates exceptionally high ROIC in a competitive industry, aided by phantom and growing intangible assets. The company has scale advantages that a) make competition with Nike uneconomical for peers, and b) allow Nike to post abnormally high relative OPMs. Nike is also a brand rather than a product company, which allows it to develop an ecosystem accretive to products outside of shoes. In short, Nike is a wonderful business.

Alignment of Interest

Ownership: Phil Knight and family own almost all the company’s Class A shares, which constitute ~22% of total shares. Class A shares are convertible to Class B shares 1:1 and hold identical economic rights. Where the As and the Bs differ is voting rights-As can vote to elect 75% of directors, while Bs only get to vote for 25%. Bill Ackman’s Pershing Square and Terry Smith’s Fundsmith own ~1.4% and ~0.5% of Nike shares, respectively. Nike has also issued $300K of redeemable preferred stock, 100% owned by Sojitz. Sojitz, previously Nissho-Iwai, is a Japanese trading house with early ties to Nike detailed in Shoe Dog.

Board: Key board members include Apple CEO Tim Cook, Travis Knight (Phil’s son), and former Nike CEO Mark Parker. Cook is the lead independent director and a board member since 2005. Travis Knight has been a director since 2015, Parker has been executive chair since 2020, and Phil Knight remains chairman emeritus. Other notable directors include John Rogers, CIO of Ariel Investments (since 2018).

Management: Elliott Hill was appointed CEO after John Donahoe stepped down in October 2024. Donahoe has been a board member since 2015 and was the former CEO of eBay, ServiceNow, and Bain. In January 2020, Donahoe became Nike CEO, a rare external hire, reportedly backed by Tim Cook. Seemingly qualified, Donahoe was tasked to lead Nike’s digital transition. However, his leadership fell short of lofty expectations, to say the least.

Hill was appointed CEO after Donahoe retired in October 2024. Hill is from Austin, TX and attended TCU. He then worked as a trainer for the Cowboys out of college. Subsequently, Hill went to Ohio University for his masters, and joined Nike’s Memphis sales team in 1988. A Nike “lifer”, Hill worked in various sales and product roles, eventually becoming President of Consumer & Marketplace. He retired in 2020 after being passed over for the CEO job.

Upon his appointment, Hill telegraphed repeatedly to staff in an internal video that Nike must “put the consumer first”. Though Hill was absent from the recent 1Q2025 earnings call, management has noted “accelerated investment in demand creation”-a reversal of Donahoe’s initiatives. There have also been signs of normalization of relations between Nike and its retailers, which have been icy under Donahoe. Tegus calls indicate that employee morale is high under Hill. Nevertheless, I am reminded of Buffett’s quote, “When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact”. Nike’s business isn’t so strong that even an idiot could run it, but the moats should be deep enough to allow it to thrive under normal management.

Compensation: Directors receive fixed fees of ~$100K, stock awards of ~$200K, and additional compensation of ~$20K as committee chairs. Directors need to hold stock valued 5x their annual cash retainer, and new directors need to attain these ownership levels within 5 years.

Executives get paid a base salary, STI, and LTI. The CEO receives a ~$1.5M base, which is only ~6% of total compensation. STI is tied to annual metrics, usually 50/50 weighted between adjusted revenue and EBIT targets. LTI is 15% RSUs, 35% stock options, and 50% PSUs. PSUs are tied to 3-year relative total shareholder returns versus the S&P 500. RSUs and stock options are tied to Class B stock prices. The CEO must own stock 8x of the base salary (3x for NEOs).

Summary: Nike has a controlling family with +20% of shares and outsized voting rights. The company also boasts a list of value-oriented shareholders (Ackman & Smith) and reputable directors (Cook, Rogers, etc.) who are financially sophisticated and long-tenured. Management and directors are compensated in a way that incentivizes skin in the game and shareholder value creation. However, I am slightly disappointed by the fact that STI metrics are not tied to creating value per-share. On the positive side, management aggressively repurchases shares (more on this under capital allocation), and benchmarks itself against a tough index, the S&P, on a long-term basis. Therefore, the per-share focus is more or less implied. Overall, Nike’s setup allows the founding family to retain control, fostering dialectic materialism between a long-term orientation (opposite of Wall Street) and fewer minority shareholder rights. Mr. Ackman and Smith don’t seem to mind-I don’t either.

Capital Allocation

Nike’s capital allocation is simple and understandable. The chart below breaks down how the company’s OCF, capex, dividends, and buybacks flow through the CF statement:

Basically, money comes in, money goes out to shareholders. So how does Nike grow with such low levels of capex? The answer is through the P&L. By investing in R&D and demand creation, Nike creates new and compelling products, then markets them to existing and new markets. A) is accretive to price and b) is accretive to volumes. Hence, Nike’s growth capex isn’t done via the CF statement but via the P&L.

Nike is not an acquisitive company, preferring to grow organically. This is a positive since management is unlikely to squander FCF on M&A. Nike has bought brands such as Converse, Hurley, and Cole Haan in rare instances. Converse was a home run-Nike paid ~$300M in 2003 for $205M in sales, which grew to ~$2B in sales and $500M in EBIT in 2024. Hurley and Cole Haan were less successful.

Margin of Safety

Why This Opportunity Exists: Nike suffered a ~20% derating in June 2024 due to disappointing 4Q2024 results, which saw the stock go from ~$95 to ~$75. The company missed revenue and GM expectations and offered underwhelming 1Q and full-year 2025 guidance. The stock bottomed around late July at ~$70, then recovered to ~$85 going into September, but de-rated again to ~$78 until CEO John Donahoe announced his retirement and replacement by Elliott Hill. The market received Hill enthusiastically, re-rating the stock to ~$90. But in early October, Nike missed 1Q revenue expectations (though beating on GM) and withdrew a) 2025 guidance and b) the November 2024 investor day indefinitely. Hill was not present as the CFO led the 1Q call. For 2Q, the CFO offered revenue and GM guidance below expectations. Since then, the stock has embarked on a slow decline from ~$90 to ~$75 today:

5 key overhangs remain for Nike:

1. Management Change: Though Hill was well received by the market, lack of communication and the investor day delay have created uncertainty for catalyst-driven investors.
2. Growth/Share Loss: Nike is ceding shelf space and market share to new entrants like Hoka and On, causing growth to decline.
3. Lack of Product Innovation: Former employee Massimo Giunco posted a LinkedIn rant in July 2024 about Nike’s product innovation issues, which received 10k likes and ~700 reposts. There was also a hit piece from the Telegraph titled “I wouldn’t wear these trainers – my dad has them’: How Nike lost its edge. Anecdotally, Nike has been selling me the same shoes as when I was a decade younger.
4. China Weakness: While not exactly news, China’s economic and political issues have added uncertainty to Nike’s growth and supply chains. I believe these fears are slightly overblown since only 15% of sales and 18% of production is in China (Nike has shifted most of its production to Vietnam and Indonesia, or 50% and 27%, respectively). Chinese sales are also not performing nearly as badly as consensus expects-it’s beaten street estimates for 2 quarters in a row.
5. Margin Pressures: Management expects GM shrinkage of 150bps in 2Q. The company also expects demand creation expense to increase, though offset by overhead reduction. Margins and EPS estimates could miss if management fails to deliver tighter overhead against rising marketing spend, which could cause pod shops to steer clear of Nike stock.

Historical Multiples: All of Nike’s relevant multiples are trading at a discount on 3, 5, and 10-year numbers and in line with 20-year multiples. Forward multiples exhibit the same pattern:

Peer Multiples: Nike trades at ~20%-30% discount to comps despite positing significantly higher margins than peers.

DCF: I assumed sales decline and recovery in line with consensus in 2025 and 2026, followed by gradual recovery to historical topline growth of 7%. The Nike brand travels well and has ample runway for expansion internationally, particularly in India and Indonesia. Secular trends like workplace casualization and growing women’s sports participation also help. I believe 7% is reasonable since it is approximately global GDP +1%.

Veering away from consensus, I project no EBIT margin expansion for Nike. As mentioned before, Nike is not a business with operating leverage. The street thinks EBIT margins could expand up to ~15%, which could lead to a DCF value of ~$120-$130/S. Call me old-school, but I don’t buy it.

I believe long-term interest rates will stay ~4%, or ~3% post-tax. Add 4% of risk premium, and we will arrive at a WACC of ~8%, or ~6% post-tax. With a 16x terminal multiple, we get to an intrinsic value of ~$100/S for Nike-~40% upside from my recommended buy price of ~$70:

The Templeton/Oakmark Way: Sir John Templeton liked to buy stocks for under 5x his estimated Fwd 5-year EPS. Similarly, Oakmark’s Bill Nygren is willing to pay for companies trading below a market multiple on his estimated Fwd 7-year EPS. ~$9B of Nike’s ~$18B buyback authorization remains, and the company typically repurchases ~1%-2% of shares outstanding annually. If share count shrinks at 1.5% going forward, at a 16x multiple, Nike could be a buy for Oakmark. Templeton might be less enthusiastic.

Lou Simpson: Legendary investor Lou Simpson held Nike stock for years, according to his profile in Concentrated Investing by Allen Benello. Simpson liked to buy Nike at ~8% FCF yield when rates averaged ~6.5% (~4% post 35% tax) between 1990s-2000s, implying a ~4% risk premium. In today’s rate regime, Simpson might buy Nike at ~6%-7% FCF yield on ~$5.5B of normalized FCF-a target price of $80B-$90B. With market cap gyrating between $100B-$110B today, Nike is flirting with Simpson’s preferred levels. However, readers should note that Nike was growing faster in the 90s.

Joel Greenblatt: Nike is currently top 120/~500 stocks in the Gotham 1000 Value ETF (GVLU). GVLU was launched by Joel Greenblatt in 2022, focusing on high ROIC stocks with low earnings yield. Using the Wayback Machine, I was able to ascertain that Nike was top 35/~500 stocks in GVLU during July 2024 lows (~$73). Nike is also one of Greenblatt’s Value Investors’ Club’s most written-up names. This is a further indication that Nike is cheap and high quality:

Summary: Nike trades at a discount to historical multiples, comps, DCF and valuation points that would make super investors salivate. The bottom line is this-Nike is cheap.

Risks

Execution Risk: Nike could experience long lead times to come up with new and compelling products. Moreover, the company would have to amend relationships with its wholesale accounts, which is a time-consuming process. The aforementioned factors could lengthen the timeline for Nike’s turnaround.

Volatility: Nike withdrew its investor day indefinitely and switched from providing yearly to quarterly guidance, which could cause heightened volatility for the stock price in the short term. Nike is not a stock for investors with a short time horizon.

Operational Risk: Nike’s overseas manufacturing base is located in Vietnam, Indonesia and China. Geopolitical uncertainty in each of these countries could negatively affect the company’s supply chain capabilities.

Conclusion

Nike is a wonderful business with durable moats, selling at a fair price. The company is highly aligned with an involved majority owner, a financially sophisticated board, a lifer CEO benchmarked against SPX, and minority shareholders with impressive investment track records. Nike is also adept at allocating capital, electing to avoid M&A to prioritize organic growth through R&D and marketing. Buffett once said, “The best thing that happens to us is when a great company gets into temporary trouble. We want to buy them when they’re on the operating table”. Nike is on the operating table for a minor surgery. I recommend going long Nike at $65-$70/S for a price CAGR of ~13%-15% as the company trades back to its DCF intrinsic value within 3 years while collecting ~2% dividends in the interim.

Editor’s Note: This article was submitted as part of Seeking Alpha’s Top 2025 Long/Short Idea competition investment competition, which runs through December 21. With cash prizes, this competition — open to all analysts — is one you don’t want to miss. If you are interested in becoming an analyst and taking part in the competition, click here to find out more and submit your article today!

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of NKE either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Nike: Just Buy It appeared first on Up2info.com.

• We’re monitoring NIKE for a long-term entry setup, anticipating a potential low in the coming months based on price structure and fundamentals.
• Lyn Alden highlights NIKE’s overvaluation and growth issues, needing revenue and earnings stabilization to confirm a fundamental bottom.
• Our methodology provides a dynamically adaptable approach to analyzing market sentiment and projecting likely movements in stocks like NKE.

By Levi at Elliott Wave Trader; Produced with Avi Gilburt

We’re looking for a long-term entry setup for NIKE (NYSE:NKE) (NEOE:NKE:CA). If you have been following our work on this one, you will know that

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in NKE over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Nike’s share price has fallen significantly due to slower growth, but its strong fundamentals and the return of a former CEO make it a buy.
• Despite recent revenue misses, Nike’s robust free cash flow and aggressive share repurchase program support long-term growth and dividend safety.
• Nike’s competitive advantages include strong brand recognition, global operations, and high R&D spending, positioning it well against competitors.
• Current valuation metrics suggest Nike is undervalued, with a solid dividend yield and potential for significant upside if growth challenges are addressed.

Nike (NYSE:NKE) is a global leader in selling athletic footwear and apparel. The share price has fallen significantly on slower growth. Nike still has many strengths, and the return of a former CEO should help it recover. The dividend yield is at a decade high, the dividend safety is solid, and the company will probably become a Dividend Aristocrat. The equity is undervalued and an attractive dividend growth stock. I currently view Nike as a buy.

Overview of Nike

Nike was founded in 1964. It is the global leader in developing, marketing, and selling athletic footwear and apparel. It also sells sports equipment, accessories, and services. Major brands include NIKE, Air Jordan, Converse, Chuck Taylor, All-Star, and others. The firm sells products through its website, retail stores and outlets, national chains, and direct-to-customers (“DTC”). The global retailer has about 18% of the worldwide market share, and Interbrand lists it as number 14 among the top 100 global brands.

Total revenue was more than $51,362 million in fiscal 2024 and $50,012 million in the last twelve months (“LTM”). The firm’s fiscal year usually ends on May 31^st.

Revenue and Earnings Growth

The firm reported first-quarter fiscal year 2025 results on October 1^st, 2024, that missed revenue but exceeded earnings per share (“EPS”) estimates.

Revenue decreased about 10.4% to $11,589 million but missed analyst estimates by $50 million and adjusted diluted EPS of $0.70, beating estimates by $0.18 on higher margins and lower expenses. However, this global retailer has increased brand marketing by spending on key sporting events to create demand. Additionally, the firm continued its aggressive share repurchase program. The share price fell after the results were announced and has trended down since the results were released. Consequently, the share price declined substantially in 2024. It is down ~30.1% year-to-date and ~30.6% in the last twelve months. Moreover, the share price is down nearly 57% since its peak in November 2021.

Nike’s revenue has increased annually except in fiscal year 2020 because of the COVID-19 pandemic. The firm’s business model is simple to understand. Create demand for its athletic footwear and apparel and distribute it through an omnichannel approach. The company has done an excellent job in this regard, the 10-year average growth rate is 6.3%, while the 5-year growth rate is a bit lower at 5.6%.

Nike’s growth is primarily organic. It makes few acquisitions. The combination of rising market share, greater volumes, higher prices, and geographic expansion has fueled long-term growth. The firm competes in essentially all athletic footwear and apparel categories globally. It employs a strategy to continuously innovate faster while making it easier for customers to purchase Nike’s products.

Similarly, EPS has risen in most years in the past decade except in fiscal 2018, 2020, and 2023. The pandemic caused significant disruption to sales, and customers stayed home. That said, EPS recovered quickly. The EPS growth is boosted by consistent share repurchases, significantly reducing the share count by roughly 15% in the past decade. Consensus estimates are for $2.81 per share in fiscal year 2025, a ~29% decline from fiscal 2024. However, the long-term growth average is 9.7% for five years and 10.3% for ten years.

Although Nike is facing near-term challenges, a new CEO and a return to its roots should permit Nike’s revenue and EPS to continue rising in the foreseeable future because of demand and market expansion. The firm’s robust free cash flow (“FCF”) lets it spend on-demand creation, marketing, and innovation in ways its smaller competitors cannot. One wild card is sales in China, which have not yet recovered because of that country’s economic malaise.

Another potential source for top and bottom-line growth is acquisitions. That said, Nike does not follow a growth through acquisition model. However, it has bought and reinvigorated brands in the past, such as Converse, which now generates $2+ billion in sales. Other niche brands Nike purchased were later sold for a profit.

Recent Challenges and Risks

Nike’s main challenge is its missteps regarding shifting to a DTC from a wholesale business model. This has been well discussed, but the impact has been disappointing growth, especially compared to its competitors such as Hoka and On. Although DTC made sense during the pandemic, it affected brand building and caused other issues. The return of a former CEO may address this challenge.

Besides the above issue, Nike faces risks from enhanced competition, supply chain disruptions, and foreign exchange volatility.

Competitive Advantages

Nike’s competitive advantage is its brands, scale, and innovation. The firm’s marketing prowess has resulted in growing sales and market share. The Interbrand ranking and immense effort at sponsorships across sports reinforce this perception. Next, the firm has global operations, allowing it to meet demand and changing tastes almost anywhere. The firm also spends more than its peers on R&D, which leads to new products and features.

Dividend Analysis

Nike’s share price weakness since 2021 has caused the dividend yield to surge to near decade-high and well above its 5-year average of 1.12%. The forward yield is now about 1.95%. This suggests significant undervaluation.

Nike is also a Dividend Contender with a 23-year streak of increases. The annual growth rate has been remarkable and at a double-digit rate for the past five and ten years. Even though the payout ratio is slowly rising, we expect further increases to maintain the streak.

The dividend is supported by excellent safety. The forward payout ratio is around 43%, based on an estimated 2025 EPS of $2.81. This value is excellent and below my target of 65%. The firm usually generates billions in FCF, which more than covers the dividend requirement of $2,203 million. The FCF has fluctuated in the past five years because of recent challenges and the pandemic. Assuming an FCF of $5,000 million in this fiscal year, it gives a dividend-to-FCF ratio of 44%, easily less than our target percentage of 70% or better.

Another positive attribute is Nike’s balance sheet. It carries $12 million of short-term and current long-term debt and $7,998 million of long-term debt. It is offset by about $10,2994 million in cash and equivalents, giving a net cash position. Nike’s long-term operational performance and solid financial position have resulted in the credit rating agencies issuing an AA-/A1 high-grade or upper-medium investment grade rating.

Lastly, Nike receives an ‘A+’ dividend quality grade from Portfolio Insight, placing it in the 95^th percentile. It measures earnings performance, revenue performance, dividend performance, profitability, and financial strength. At the same time, the Seeking Alpha Quant system gives a ‘B-’ for safety, an ‘A-‘ for growth, and an ‘A’ for consistency. However, people should be confident about dividend safety at this juncture despite some negatives.

Valuation

Nike’s share price is greater than 50% below its all-time high. Lower expected EPS in fiscal 2025 and a decreasing stock price this year has caused the forward price-to-earnings (P/E) ratio to drop to ~27.0X. Still, this value is at the lower end of the 5-year trailing average and below the 10-year range.

Analysts estimate the company will earn at least $2.81 per share in fiscal 2025, much less than in fiscal year 2024. We will use 25X as a reasonable, fair-value multiple and below the five-year average, accounting for recent difficulties. As a result, our fair value estimate is $70.25. The present share price is ~$75.88, indicating that Nike is overvalued.

Applying a sensitivity calculation using P/E ratios between 24X and 26X, we obtain a fair value range from $67.44 to $73.06. Hence, the stock price is approximately 104% to 113% of the fair value estimate.

Estimated Current Valuation Based On P/E Ratio

Click to enlarge

Source: Dividend Power Calculations

How does this calculation compare to other valuation models? Portfolio Insight’s blended fair value model, combining the P/E ratio and dividend yield, estimates a fair value of $108.32 per share. The two-model average is ~$89.29, indicating that Nike is undervalued at the current price.

Wall Street analysts have an average price target of $91.58, or 20.69% higher than the current value and more than our two-model average. However, analysts are divided in their ratings with 15 strong buys, four buys, 17 holds, one sell, and two strong sells. In addition, the Seeking Alpha Quant system rating is a hold at 2.84 because of valuation, growth, momentum, and earnings revisions. However, the profitability score is an ‘A+.’

Final Thoughts

Nike has historically been an outstanding investment, albeit volatile, because of economic downturns. It has increased market share, sales, and EPS over time, allowing it to pay an increasing dividend and repurchase shares. The valuation picture is complex, but the composite view is that Nike is undervalued, especially if the new CEO can return the firm to its former glory. This, combined with the acceptable yield, solid dividend safety metrics, balance sheet, and growth potential, makes the equity attractive. I currently view Nike as a buy.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of NKE either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Nike: Navigating Near-Term Challenges With Potential Upside appeared first on Up2info.com.

• Nike’s stock, previously rated as a “Sell” due to high valuation, has declined 37% since 2020, making its valuation multiples more reasonable.
• Despite recent revenue and earnings declines, Nike’s long-term fundamentals remain strong, with a wide economic moat and consistent performance.
• Analysts expect Nike’s bottom line to grow at a CAGR of 9.09% over the next decade, supported by market share gains and share buybacks.
• Given its current valuation and strong support levels, Nike is now rated as a cautious “Buy” for long-term investors.

My last article about Nike, Inc. (NYSE:NKE) was published four years ago in October 2020 and back then I rated the stock as a “Sell” – and among the nearly 800 articles I have written in last eight years, there are only a few companies (and stocks) I rated as a “Sell”. In the article I wrote the following conclusion:

Don’t get me wrong – Nike is a great business. But the question is, if we should buy the stock right now or if we should wait a few months or quarters and hope for lower prices. Nike is trading for extremely high valuation multiples and also seems to be overvalued when using a discount cash flow analysis. And especially short-term oriented investors might probably buy at the wrong time.

And in the first few quarters after my “Sell” rating, the stock continued to increase, and it was certainly possible to argue that I got it wrong and did underestimate Nike. But in late 2021, the stock peaked around $180 and since summer 2022, the stock is now trading at a lower price (or at best, the same price) compared to the point when my last article was published.

At the time of writing, the stock has declined 37% since the article was published and the logical question now seems: Is Nike cheap enough to be a “Buy” again? In the following article we will examine Nike from different perspectives – including valuation multiples, which became more reasonable, we look at the chart, and we look at fundamentals and growth potential in the years to come. We start by looking at the valuation multiples.

Valuation Multiples

Nike was one of those companies rated as “Sell” due to the extremely high stock price. Or to be more precise: the stock price was extremely high in comparison to the fundamental business, which resulted in very high valuation multiples for the stock. However, since its all-time high, Nike declined almost 60% and this steep decline also had an impact on the P/E ratio and P/FCF ratio (especially as the fundamental business continued to perform well – we will get to this).

At the time of writing, the stock is trading for 22 times earnings and 16 times free cash flow. When looking at the last 10 years, the stock is now trading for the lowest valuation multiples.

We can argue that 22 times earnings is still not an extreme bargain, but considering the high quality of Nike’s business (we will get to this) is making the stock also not expensive at this point. And 16 times free cash flow for a business that has a wide economic moat and is growing with a solid pace and high levels of consistency (at least the top line) seems certainly justified and might already deserve the label “bargain”. But let’s first look at the quarterly results and the long-term solid performance before we return to an intrinsic value calculation at the end.

Quarterly Results

We could argue that Nike’s stock price declined mostly due to the high valuation that was not justified anymore and investors got more cautious. But we can also look at the last quarterly results and the declining top and bottom line was also not helpful for the business and stock price. On October 01, 2024, Nike reported first quarter results and while the business did beat expectations for earnings per share it missed revenue expectations slightly.

When looking at the numbers in comparison to the same quarter last year, the earnings were rather a disappointment. Revenue declined 10.4% year-over-year from $12,939 million in Q1/24 to $11,589 million in Q1/25. Income before income taxes also declined from $1,648 million in the same quarter last year to $1,307 million this quarter – resulting in a decline of 20.7% year-over-year. And diluted earnings per share also declined from $0.94 in Q1/24 to $0.70 in Q1/25 – a bottom-line decline of 25.5% year-over-year.

When looking at the different regions all four declined, but it was especially North America as well as Europe, Middle East & Africa struggling. Both declined in the low double digits in the first quarter of fiscal 2025. Greater China declined 4% year-over-year, and Asia-Pacific & Latin America declined 7% (though adjusting for currency exchange rates, the decline was only 2%).

And when looking at the different categories, Equipment increased revenue 14% year-over-year to $603 million, while Apparel as well as Footwear both declined 11% year-over-year.

Solid Performance

When looking at the last few years, Nike still performed solid. Revenue on an annual basis has continued to increase although top-line growth in fiscal 2024 was only 0.3% year-over-year. Earnings per share fluctuated a little more in the last few years, but EPS for fiscal 2024 was still solid and at a similar level as fiscal 2021 and fiscal 2022. Compared to fiscal 2023, the bottom line increased 15.5% year-over-year.

When looking at the earnings revisions in the last few quarters, we see that analysts are constantly getting more pessimistic and assumptions for the next few years are constantly lowered. For example, about three years ago, analysts were still expecting earnings per share for fiscal 2025 to be as high as $6.80 – now analysts are only expecting $2.81 in earnings per share.

But while expectations were constantly lowered in the last few years, analysts are still expecting Nike to grow its bottom line in the years to come. Following a decline in fiscal 2025, analysts are expecting double-digit growth rates again. And between fiscal 2024 and fiscal 2034, Nike’s bottom line is expected to grow with a CAGR of 9.09%.

Different studies expect the apparel market to grow only in the mid-single digits in the years to come. Grand View Research is expecting the global apparel market to grow with a CAGR of 4.1% until 2030 and the U.S. market to grow only 3.3%. Another study from Mordor Intelligence is a little more optimistic and expecting an annual growth rate of 4.6% for the same timeframe. And other studies focusing especially on the sports apparel market are more optimistic and are expecting growth rates of 6.5% annually.

If we assume that the overall market will grow only in the mid-single digits and analysts are expecting high single-digit to double-digit growth rates for the bottom line, we must ask where the higher growth rates should come from. One simple answer is: by taking market shares from competitors, which seems likely and might actually contribute to higher top-line growth.

Share Buybacks

Bottom-line growth can also stem from share buybacks and in the last few decades management used the tool of share buybacks frequently. In the last ten years, Nike decreased the number of outstanding shares with a CAGR of 1.63% and in the last 20 years, the number of outstanding shares decreased with a CAGR of 1.81%. In the last quarter, Nike spent $1.2 billion on share buybacks

And we can assume share buybacks to contribute in a similar way to bottom-line growth in the years to come, and about 1.5% to 2% annual growth might stem from share repurchases. By the way, share repurchases are more effective right now – in the last few years, Nike bought back shares for rather high prices as the stock was mostly trading for extremely high valuation multiples. Right now, the company might be able to repurchase about 4% of outstanding shares with the generated free cash flow and still have enough cash to keep the dividend at current levels.

Margin Improvement

Aside from top-line growth and share buybacks, bottom-line growth can also stem from higher margins and the company being more efficient. But I don’t know if we can assume margin improvement in the years to come. Of course, this could be a huge contributor to bottom-line growth, but when looking back at the last 30 years, we can describe the gross margin as very stable in the last 20 years (which is a good sign as it is showing pricing power) and operating margin was fluctuating over the last 30 years, but we don’t see a clear uptrend.

Performance During Recessions

When talking about growth, we should also look at the opposite site and talk about the risk we are seeing for Nike. And one major risk I see for the business in the coming quarter is the looming recession. This is a risk not only Nike is facing, but as a consumer goods company, it is rather cyclical and often reacting to recessions. Nike is mostly selling products, which are not essential, and a purchase can sometimes be postponed a few quarters or months.

And when looking at data from the last few decades – especially for revenue, earnings per share and free cash flow – we see the business reacting to recessions in the past. It is not always the same pattern, but we see revenue declining around a recession almost every time. In a potential looming recession, we could see a similar pattern. We already see revenue declining for Nike, and the first quarter results for fiscal 2025 (see section above) were certainly not great.

And while sales in Greater China might improve again in the next few quarters – as the situation in China might overall get better (see my article Tencent (OTCPK:TCEHY) and Alibaba (BABA) for more details) – sales in the United States and Europe might come further under pressure. But that is only a temporary decline. Over the long run, I am rather optimistic about Nike growing its business.

High-Quality Business

The reason I am long-term optimistic about Nike is very simple. Nike is a high-quality business with a wide economic moat. In my first article about Nike, I described the moat in more detail, which is mostly based on the brand name as well as cost advantages the company has.

When looking at the outperformance of Nike vs. the S&P 500 during the last four quarters, we see a really impressive outperformance of Nike, which is a strong hint for a wide economic moat around the business. A second major metric we can look at is the return on invested capital, which was above 10% in almost every year since the early 1990s and 20.4% on average in the last three decades and 24.24% on average in the last ten years

And finally, a stable (or improving) gross and operating margin is also a strong sign for a wide economic moat. And as I have mentioned above, especially Nike’s gross margin is showing strong signs of stability and consistency.

All these points make me optimistic about the long-term potential of Nike, as a wide economic moat is leading to pricing power and the ability to fend off competitors.

Intrinsic Value Calculation

I already mentioned above that Nike’s valuation multiples declined in the last few quarters, and we can describe the current P/E ratio and especially P/FCF ratio as reasonable. Additionally, we are using a discount cash flow calculation to determine an intrinsic value for the stock. As always, we are calculating with a 10% discount rate (that is the annual return we like to achieve at least) and the last reported number of diluted outstanding shares (1,502 million). As a basis, we can use the free cash flow of the last four quarters and although free cash flow is at an all-time high, I would still see it as a reasonable assumption for Nike.

For the next ten years, I assume similar growth rates as analysts, and we are calculating with 9% growth followed by 4% growth till perpetuity. When calculating with these assumptions, we get an intrinsic value of $111.57 for Nike and the stock could be considered undervalued at this point, and it might even be a bargain.

Technical Picture

When trying to answer the question at which price we should buy Nike, we can also look at the chart. And the stock seems already close to a major support level, but might decline a little lower. For starters, we have the 200-months simple moving average at $64, which is often a strong support and the bottom in a major correction. Additionally, we find the highs of 2015 as well as the lows of December 2018 around $68 – generating another strong support level. Finally, around $60 we have got to COVID-19 lows, but that was rather a single spike and maybe not such a strong support level.

And Nike already declined close to $70, and therefore I don’t know if the stock will decline much lower again or if it has found its bottom, but between $65 and $70 (if the stock should drop there again) we find the buying range.

Conclusion

At this point, I certainly must change my rating, as Nike is not a “Sell” anymore. I though long about whether Nike is now a “Buy” or if we should rate it as a “Hold” but in the end, Nike is trading about 20% below its intrinsic value and seems close to a strong support level, which makes it a cautious “Buy” in my opinion.

Of course, Nike is struggling right now, and the next few quarters will not be easy for a company that is depending on consumer sentiment. But in the long run, the wide economic moat will lead to high-growth rates. And this makes Nike a cautious “Buy” at this point.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of BABA, TCEHY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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