Nike‘s (NYSE: NE) On June 28, the company’s stock fell 20% to a four-year low after its latest earnings report. For the fourth quarter of fiscal 2024, which ended May 31, the athletic footwear and apparel maker’s revenue fell 2% from a year earlier (and was flat on a currency-neutral basis) to $12.6 billion, missing analyst expectations by $250 million. Its diluted EPS rose 50% to $0.99, beating consensus estimates of $0.15 per share.
Did the market overreact to this revenue decline? Let’s look at Nike’s recent challenges, future expectations, and valuation to see if investors should buy its dip after the earnings release.
Nike’s revenue growth stagnates
In fiscal 2023, Nike’s revenue grew 16% on a currency-neutral basis. Most of this growth was driven by its direct-to-consumer segment Nike Direct, which grew 20% on a currency-neutral basis and accounted for 42% of its revenue.
But in fiscal 2024, the company’s revenue grew just 1% on a currency-neutral basis, with Nike Direct sales up just 1%. Nike Direct’s year-over-year revenue growth also stalled in the third quarter and even declined in the fourth quarter. As a result, its total sales growth has stagnated over the past three quarters.
Metric | Q4 2023 | First quarter 2024 | Q2 2024 | Q3 2024 | Q4 2024 |
|---|---|---|---|---|---|
Nike Direct Revenue Growth (YoY) | 18% | 2% | 4% | 0% | (7%) |
Total revenue growth (year-on-year) | 8% | 6% | (1%) | 0% | 0% |
Data source: Nike. Monetary neutral basis. YOY = year over year.
Nike blamed the slowdown on unfavorable macroeconomic factors for its entry-level customers, weak physical sales in China, uneven demand in the EMEA (Europe, Middle East and Africa) region and weak demand for some of its traditional footwear franchises. The strong dollar, which shaved 2 percentage points off its fourth-quarter revenue growth, will likely add to that pressure for at least a few more quarters.
Nike expects the slowdown to deepen, with its reported revenue for fiscal 2025 falling about 10%, significantly missing analysts’ expectations for 1.5% growth.
But while Nike stagnates, many of its competitors are prosperous and expandingAnalysts expect its Swiss rival to On (NYSE: ONON) to generate 29% sales growth this year. Lululemon (NASDAQ:LULU)which is selling more shoes as it expands beyond yoga and athletic wear, is expected to see revenue grow 12% this year.
On Nike’s earnings call, CEO John Donahoe said fiscal 2025 would be a “transition year,” during which the company would begin a “multi-year innovation cycle” and invest in more “consumer-facing activities” to strengthen its brand. Unfortunately, Nike’s post-earnings slide suggests investors aren’t exactly optimistic about its turnaround plans.
But its margins are stabilizing
On the positive side, Nike’s gross margin expanded 110 basis points to 44.6% in fiscal 2024. This expansion was driven by lower freight and logistics costs, as well as higher prices for some of its premium products. The company expects these tailwinds to boost its gross margin by 10 to 30 basis points in fiscal 2025.
These rising margins indicate that Nike still has significant pricing power and can offset promotional sales of lower-margin products with stronger sales of higher-margin premium products. That said, On and Lululemon still posted much higher gross margins of 59.7% and 57.7%, respectively, in their most recent quarters.
Nike has laid off about 2% of its workforce this year and may continue to cut costs to squeeze more out of flat sales. But tightening spending controls could inadvertently cripple the company’s turnaround strategies.
Nike did not provide a full-year profit forecast, but analysts had previously expected earnings to fall 2%. Based on that forecast — which will likely be revised down after its bleak revenue outlook — the stock trades at 25 times long term benefitsI expect this multiple to increase in the coming weeks as analysts cut their earnings estimates.
Nike probably won’t attract many buyers, as it’s easy to find faster-growing companies with lower valuations. Lululemon, which is expected to grow earnings 12% this year, trades at just 21 times forward earnings.
Don’t buy Nike (for now)
It might be tempting to buy Nike stock after its latest decline, but I wouldn’t touch it until the company proves that its challenges are merely cyclical, not existential. Nike Direct’s slowdown is worrisome, and the company appears to be struggling to compete with resilient niche competitors like On in some regions. Unless Nike gets its act together in the coming quarters, the stock will likely fall further as investors turn to higher-growth competitors.
Should You Invest $1,000 in Nike Right Now?
Before you buy Nike stock, consider this:
THE Motley Fool, Securities Advisor The team of analysts has just identified what they believe to be the 10 best stocks Investors Should Buy Now…and Nike Wasn’t One of Them. The 10 Stocks Picked Could Deliver Monstrous Returns in the Years to Come.
Consider when Nvidia I made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $757,001!*
Securities Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building advice, regular analyst updates and two new stock picks each month. Securities Advisor the service has more than quadrupled the return of the S&P 500 since 2002*.
*Stock Advisor returns as of June 24, 2024
Sun Leo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica and Nike. The Motley Fool recommends On Holding and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a position in the stocks mentioned. disclosure policy.
Nike Stock Is Crashing. Should You Just Buy the Dip? was originally published by The Motley Fool
