June 30, 2023
Footwear giant has addressed many investor concerns, and its stock is cheap
By guest author Jinjoo Lee from the Wall Street Journal.
It isn’t an easy time to be selling sneakers, even for Nike NKE -2.65%decrease; red down pointing triangle. But that shouldn’t overshadow the brand’s enduring strength.
Nike on Thursday said sales rose 8 % excluding currency impacts in its quarter ended May 31 compared with a year earlier, better than Wall Street’s expectations for 5.4 % growth. Net income, though, declined 28 %. That was partly because of higher product input and logistics costs, as well as higher markdowns, which pressured Nike’s gross margins. The company also said it faced higher wage-related expenses. Operating margins fell to 9.5 % from 11.6 % a year earlier. Nike’s shares, which were already down 3.1 % year to date, shed another 4% in after-hours trading following its results.
nvestors have had a few reasons to be worried about Nike. One concern was its return to selling at retailers—such as Macy’s and DSW—that it previously pulled back from to preserve margins and cachet. That introduced not only concern about the soundness of Nike’s direct-selling strategy, but also questions about its brand perception. Another worry was China, where recovery had been slow. And third, there was growing unease that Nike might be losing market share in its running business to specialty brands such as Hoka and On, which are growing at a furious pace—even if from a much smaller revenue base. Hoka and On grew their sales by 40 % and 78 % on-year, respectively, in their most recent quarters.
Nike’s latest results provided some level of assurance. For one, sales through third-party (wholesale) partners—such as Macy’s and Foot Locker—aren’t stealing Nike’s thunder anymore. Its direct channel revenues were up a healthy 18 % on a currency-neutral basis, while wholesale revenue was up just 2 %. Plus, sales in the Greater China region rose 25 % on a currency neutral basis, about USD 140 million more than Wall Street expectations.
Less reassuringly, Nike’s commentary about its running business gave an impression of a company that was caught on its back foot: Chief Executive John Donahoe said running has been a “competitive battlefield lately” and that Nike is now looking to “reinvigorate” its running footwear line.
The company’s path to better profitability won’t be easy. While it expects gross margin to expand in the current fiscal year (ending May 2024), its path could be obstructed by unsold, discounted sneaker inventory in the market. Footwear brands—including Adidas, Puma and On—have all seen a slowdown in the pace at which inventory is sold. Still, the promotional environment is an industrywide problem, not Nike’s exclusively, and while growing competition from On and Hoka are worth monitoring, the issue shouldn’t be blown out of proportion: A June survey conducted by Citi showed that when North American consumers were asked which athletic brand they considered purchasing next, the top choice was Nike at 32%. Hoka and On commanded 1% and 0%, respectively.
Investors’ downbeat sentiment has put Nike on an alluring discount, with its shares now going for roughly 3.2 times forward sales, 15% lower than its five-year average. Now might be the time to pounce.