Patient investors seeking a high-quality, progressive dividend-paying company with one of the globe’s most iconic brands should buy Nike (NKE:NYSE), the lately-unloved sportswear giant trading at a discount to its own history with the shares down 20% over one year and 10% over five.
Despite its recent struggles, Shares believes this is an opportune moment to buy the sneakers-to-soccer ball behemoth.
Nike is in the early stages of a turnaround under new chief executive Elliot Hill, who is laying the foundations for sustainable growth following strategic missteps under his predecessor, which included reduced product innovation and an overemphasis on direct-to-consumer business Nike Digital which allowed competitors to gain market share.
Hill has come out of retirement with a strategy to return Nike to growth, and the footwear firm is now focused on returning sport to the centre of everything it does.
Turning Nike round could prove more of a marathon than a sprint, however. As such, investors could open a position ahead of third quarter earnings on 20 March, where evidence of an improving North America or Greater China sales performance, or a confident outlook from management, could be the catalyst for the first leg of a rally.
WHAT’S GONE WRONG IN NIKETOWN?
Oregon-based Nike’s recent stumbles reflect mistakes in product and distribution under the previous leadership which led to market share losses and alienated key retail partners at a time when Chinese consumers seemed to lose their appetite for US brands.
Under company veteran Hill, the world’s biggest sportswear firm is refocusing on sport and switching its innovation engine back on in order to regain the customers lost to arch-rival Adidas (ADS:ETR) and upstarts like On Running and Hoka, while Nike’s distribution strategy also needs refining after the shift to selling direct to consumers largely failed to deliver.
Broker Jefferies has been cautious about the stock due to competition headwinds, but recently upgraded its recommendation from ‘hold’ to ‘buy’, making Nike its new top pick with a $115 price target implying 45% upside from current levels.
The broker pointed out Hill is ‘tackling product and distribution issues head-on, positioning the brand to again outgrow the market and take back lost share. Survey work illustrates Nike’s brand remains very strong, proving that issues were self-inflicted and competitive threats less severe.’
Improving product and adding back distribution will enable Nike to regain share in an athletic footwear and apparel market GlobalData expects to grow at a 3% to 4% compound annual growth rate through to 2028.
THE RIGHT PLAYBOOK
Nike’s results for the second quarter to 30 November 2024 (19 December) proved better than feared, although sales were down 8% year-on-year at $12.4 billion.
Heavy discounting and a lack of product newness drove sales and profit declines, with revenue lower in all four of Nike’s geographic regions including North America and Greater China.
There was also disappointment at the footwear giant’s forecast of a low double-digit revenue fall for the third quarter including Christmas.
Jefferies notes Hill has ‘prioritised restoring wholesale partnerships and driving innovation’ and the new broom is ‘intimately engaged with current and lapsed retail partners. We think Hill has the right playbook; it worked a decade ago, so it’s highly likely to work again.’
The broker’s survey work also shows that more than half of US consumers planning to buy athletic footwear this year will choose Nike shoes, and more than 60% of those aged 18 to 44 will choose Nike.
‘This underscores the brand’s ubiquity and suggests it is still very strong ahead of future innovations with NikeSKIMS and in the running category,’ explained the broker.
For the uninitiated, Nike is partnering with celebrity Kim Kardashian’s SKIMS clothing line to launch a new brand aimed at women, which will focus on apparel, footwear and accessories for the female fitness and activewear sector, with an initial launch this spring through selected US retailers and a global rollout planned for 2026.
Stockopedia shows Nike shares trading on a forward price-to-earnings (PE) ratio of 38 times for the year to May 2025 falling to 32.7 on 2026 estimates.
Not dirt cheap, but investors should expect to stump up for what remains the world’s leading sportswear company, and the rating represents a discount to the 80 times multiple reached at the height of the pandemic.
Investors should also note the stock’s income attraction, with Nike having increased its dividend for 23 years on the spin.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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