Detailed Analysis of Fiscal 2024 Earnings
Nike (NYSE: NKE) shares have suffered significantly following a dismal forecast for fiscal 2025. The athletic apparel and footwear giant predicted an unexpected sales decline, resulting in a 30% drop in its stock year to date. And has been all the rage last week. This decrease extends Nike's downward trend since its peak in 2021, with shares now down about 10% over the past five years, with the lowest valuation in a decade.
For its fiscal 2024 fourth quarter, ending on May 31, Nike reported a 2% year-over-year sales decline, totaling $12.6 billion. The Nike brand revenue saw a slight 1% dip to $12.1 billion, while Converse sales plummeted by 18% to $480 million. Despite the sales slump, Nike improved its gross margin by 110 basis points to 44.7%, attributed to lower ocean freight costs and strategic pricing changes. The company also reduced operating expenses, with selling, general, and administrative (SG&A) costs dropping by 7%, leading to a 50% surge in earnings per share (EPS) to $0.99. Additionally, Nike's inventories decreased by 11% year over year to $7.5 billion.
The major shock for investors was Nike’s guidance for fiscal 2025. The company now expects sales to decline by mid-single digits. Earnings are expected to grow 2.41% per year now compared to 12.4% over the past year. For fiscal Q1, Nike’s management forecasts a 10% year-over-year revenue decline, with the first half expected to drop by high single-digits. Challenges in its direct business, a weak wholesale order book, a sluggish market in China, and aggressive actions to manage its classic footwear franchises were cited as primary reasons for the downturn. These issues appear to be widespread, affecting nearly every segment and geography of Nike’s operations.
Evaluativing Nike’s Valuation: Opportunity or Red Flag?
Despite the grim outlook, there are some positives. Nike anticipates its gross margin to expand by 10 to 30 basis points for the year, and its inventory levels remain manageable. Historically, issues with inventory and gross margins can exacerbate sales troubles, so maintaining these metrics is crucial. Nike, an iconic brand, aims to reignite growth through product innovation and its renowned marketing prowess. However, the company’s valuation, with a forward price-to-earnings (P/E) ratio of 24, seems high for a firm facing declining sales.
Nike stock is currently trading at an unusually low valuation. With a market cap of about $113 billion and revenue exceeding $51 billion in fiscal 2024, Nike stock trades at a price-to-sales (P/S) ratio of just over 2—the lowest it has been by this metric in more than a decade. The P/E ratio just below 20 is also the cheapest in over a decade. However, not all cheap P/E ratio stocks are worth buying. Is Nike's low share price a buying opportunity or a signal to avoid the stock from further decline?
Balancing Growth, Value, and Dividends
Nike shareholders have mixed prospects. Revenue growth is crucial, but difficult for Nike at its size. Its revenue rose by less than 1% in fiscal 2024, and management predicts a modest revenue dip in fiscal 2025. Profit margins are unlikely to improve significantly, given the mature nature and size of the business. Despite these challenges, Nike’s margins are good, and the company frequently returns cash to shareholders through share repurchases and dividends. Over the last five years, share repurchases have boosted EPS by nearly 40%, and dividends have increased by nearly 70% to a 2% yield on their dividend. These measures are among the biggest positives for Nike shareholders.
Nike isn’t a risky investment given its established nature, but its growth prospects are limited. Investors might hope for a modest revenue uptick post-fiscal 2025, but any upside will likely come from share repurchases and dividends. Therefore, growth investors might avoid Nike, while value investors might find it appealing due to its low valuation, and dividend investors can look to it for its growing dividend which doesn’t look like it will stop. However, Nike’s P/E ratio isn’t significantly lower than the average for S&P 500 stocks, suggesting that while Nike isn’t a bad investment, its returns might be close to average.
Nike’s dividend history is impressive, with 21 consecutive years of increases. Its 10-year dividend growth rate of 12.5% showcases its strong dividend raises over the years, although recent raises have been in the high single-digit range. The stock’s current yield of 2% is rare for Nike, double its five-year average yield. Despite competition, Nike’s dividend remains appealing, with a modest payout ratio of 43.5%, providing flexibility for future raises.
Analyst Rating and Outlook
NIKE Brand sales fell 1% to $12.1 billion, and NIKE Direct sales dropped 8% to $5.1 billion. Converse sales fell by 18%. Regionally, North America footwear sales fell 6%, while apparel and equipment sales increased by 4% and 47%, respectively. Total North American sales were down 1% to $5.28 billion. In China, footwear and apparel sales rose by 2% and 5%, respectively, with a 3% sales increase adjusted for currency. In EMEA, total revenue increased 1%, despite an 8% drop in NIKE Direct sales. Worldwide, footwear sales declined by 4%, apparel sales increased by 3%, and equipment sales rose by 34%.
Management’s guidance for a 10% revenue decline in Q1 and a mid-single-digit sales decline for FY 2025 primarily caused the stock drop. Despite challenges, Nike remains a dominant brand with a strong market presence. However, fierce competition for their market share persits. According to Dick’s sporting goods they have declined 8% in their market share with Nike while Hoka (trading under Deckers Outdoor Corporation ticker: DECK) more than doubled its market share with a increase of 70.3% for their share price.
37 analysts believe Nike to have an average one year price target of $94 per share however there is great variance and outliers with one analyst believing it to be worth just north of $3 per share. The fair value of the stock is rated at $71.45 indicating a “hold.” The quantitative side of finance gives this stock a “buy” with it trading below 30% on the yearly RSI, which indicates a buying opportunity however I believe that investors should wait until the news cools down and we have more momentum on a upside move or we have more news understanding the long term future of Nike. Through the declining market share, and revenue forecasts for Nike currently I rate this a “Hold” right now, until we have less volatility and more concise agreement on its direction.
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