NKE
ONON
LULU
Nike (NYSE: NKE) experienced a dramatic decline, with its stock plummeting 20% to a four-year low on June 28 following the release of its latest earnings report. The sportswear giant reported a 2% year-over-year dip in revenue for Q4 of fiscal 2024, ending May 31. This revenue drop to $12.6 billion fell short of analysts' expectations by $250 million. On the plus side, Nike's diluted EPS surged 50% to $0.99, beating consensus estimates by $0.15 per share. But did the market overreact to this top-line miss? Let’s delve into Nike’s recent hurdles, future projections, and valuation to determine if savvy investors should consider buying the post-earnings dip. when Nike Direct's revenue declined.
Anemic Revenue Growth Plagues Nike
In fiscal 2023, Nike saw a commendable 16% rise in revenue on a currency-neutral basis, primarily propelled by its Nike Direct segment, which soared by 20% and contributed 42% to the overall revenue. However, fiscal 2024 painted a different picture, with revenue growth barely nudging up by 1% on a currency-neutral basis. Nike Direct's momentum also slowed considerably, rising just 1%. The dismal trend continued into Q4 when Nike Direct's revenue declined.
Nike attributed this slowdown to various macroeconomic headwinds. Lower-end consumers grappled with tighter budgets, brick-and-mortar sales in China remained weak, and demand was inconsistent across the EMEA region. Additionally, legacy footwear products saw a drop in popularity. The strong dollar further strained reported revenue growth, shaving off 2 percentage points in Q4. Economists predict these challenges will persist for several quarters, with Nike forecasting a mid-single-digit revenue decline for fiscal 2025, far below the anticipated 1.5% growth.
While Nike struggles, its competitors are advancing. Analysts predict On Holding (NYSE: ONON) will achieve a 29% surge in sales this year. Lululemon (NASDAQ: LULU) is expected to see a 12% increase as it diversifies beyond yoga and athleisure wear. During a conference call, Nike's CEO John Donahoe termed fiscal 2025 a "transition year," focusing on a "multiyear innovation cycle" and increased "consumer-facing activities" to reinvigorate the brand. However, the sharp post-earnings stock dip suggests investors remain skeptical about these recovery plans.
Stabilizing Margins Amidst Turmoil
On a brighter note, Nike’s gross margin increased by 110 basis points to 44.6% in fiscal 2024, aided by reduced freight and logistics costs and price hikes on premium products. The company expects these tailwinds to bolster margins by 10 to 30 basis points in fiscal 2025. Despite this, rising margins highlight Nike’s pricing power, even as it balances lower-margin promotional sales with higher-margin premium products. However, it's crucial to note that competitors On Holding and Lululemon reported significantly higher gross margins of 59.7% and 57.7%, respectively, in their recent quarters.
Nike has also trimmed its workforce by about 2%, signaling a potential for further cost-cutting measures to enhance profitability. However, overly aggressive spending cuts might impede the company's turnaround strategies. Analysts had initially forecasted a 2% decline in earnings, but with a gloomy revenue outlook, those estimates will likely be revised downward, pushing Nike's shares to trade at 25 times forward earnings. This multiple is expected to rise as analysts adjust their estimates, making Nike less attractive compared to higher-growth rivals, with Lululemon, for example, trading at just 21 times forward earnings.
Hold Off on Nike—For Now
While it might be tempting to scoop up Nike's stock after its recent dive, it’s wise to wait. The company needs to demonstrate that its challenges are cyclical rather than fundamental. The slowdown in Nike Direct and competition from robust niche players like On Holding remain concerning. If Nike doesn't show significant improvement in the upcoming quarters, the stock will likely dip further as investors shift their focus toward faster-growing alternatives.
