Nike's Struggles: Stock Plunge and Competitive Pressures

Nike faces significant challenges as it battles declining sales, fierce competition, and internal strategic missteps, leading to a sharp drop in its stock value.

Published June 30, 2024 - 00:06am

7 minutes read
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Nike NYSE: NKE analysts are slashing their price targets and sending the stock to the bargain basement. The company's Q4 results were good enough, but the guidance brought fear into the broader consumer discretionary market. The company cited pronounced headwinds, a lack of innovation, and lost dominance in its once-core segment when it doubled its expected revenue decline for 2025. Bad as it sounds, the long-term outlook remains bright, with growth, cash flow, and capital returns to entice investors back into the market. A rebound is possible, but it will take time.

Nike struggled in Q4 with weakness in critical segments, leading to an unexpected contraction in revenue. The company reported $12.61 billion in net revenue for a decline of 1.7% YoY that outpaced the consensus estimates by 190 basis points. Weakness was seen in the Nike Direct and shoe segments, which fell by 8% and 6%, respectively. Both brands contracted, but the most significant decline was in Converse, down 018% YoY.

During the quarter, revenue fell by 2% year-over-year to $12.6 billion, falling short of the analyst estimate for $12.86 billion. Of the revenue, $7.1 billion was attributed to wholesale, which rose by 5%. Direct-to-consumer DTC revenue fell by 8% to $5.1 billion.

The margin news is good. The company widened the gross margin on pricing and input costs, including freight. SG&A was also reduced to aid outperformance on the bottom line. The $0.99 in diluted earnings is up 50% compared to last year and beat the consensus reported by MarketBeat.com by $0.17.

The caveat is that inventory reduction is also in play, and the guidance is terrible. Execs now expect a mid-single-digit revenue decline in financial year 2025, double the prior range, and there is a risk that it is too optimistic. Competitors like On Holding NYSE: ONON are taking market share and are unlikely to return it quickly. On is specifically dominating the running shoe world, with top athletes winning in their shoes. It also expands into other markets, including cross-training, where Nike will face increased competition.

Nike's adjusted EPS of $1.01 beat the analyst estimate for 84 cents, although that isn't helping the company's case today. Nike's guidance for fiscal year 2025 was a major letdown, as it now expects sales to fall by mid-single digits after guiding for growth during its previous earnings. CFO Matthew Friend explained:

We are managing a product cycle transition with complexity amplified by shifting channel mix dynamics (and) a comeback at this scale takes time, said CFO Matthew Friend.

While Nike is still a leader in the footwear industry, competition is quickly catching up. Competitors like On NYSE: ONON and Decker's NYSE: DECK HOKA are taking a bite out of Nike's market share with new designs and innovations.

Analysts are cutting their targets and will weigh on the price action this summer and in the second half, but the stock is unlikely to fall much further. Trading near $20 in pre-market action, the stock price aligns with the 2019 levels, with revenue 22% greater and diluted earnings up 60%. In this light, the new low target of $75 set by TD Cowen could be the floor for the market. Most other revisions have the market between $80 and $100, and Oppenheimer stands by its $120 target.

Capital return will help support the market. The company produced a cash flow positive quarter aided by inventory reduction that keeps the balance sheet a fortress and capital returns safe. The dividend is market-beating at $1.48 or 1.85% yield, with the stock at $80 and safe. The payout ratio is still below 45%, and share repurchases are also a factor. Repurchases reduced the count by 2.5% average in Q4 and are expected to continue providing leverage for investors in F2025.

The quarter revealed plenty of those wins for the company, including double-digit sales gains in some performance products. But John Donahoe, Nike's president and chief executive officer, said road running, once a significant strength for Nike, continues to be:

a competitive battlefield.

Widespread softness in lifestyle sales, including men's, women's, and Jordan, declined. And due to macroeconomic uncertainty, changing new product introduction cycles and shifting consumer patterns in key markets, Nike is cutting its forecast. It anticipates that sales will fall in the mid-single digits for the full fiscal year ahead and in the high single digits in the first half. Analysts had expected the company forecast to call for a gain of about 1%.

Persistent sales weakness has added uncertainty to the firm's turnaround, writes David Swartz, an analyst who follows Nike for Morningstar. Market conditions are more challenging than expected.

Even so, he believes the underlying strength of the Nike brand is a good bet and that the company stands to benefit over the next few years from its planned marketing and product initiatives and the growth of the global market.

Nike's competitors in the affordable category include Hoka and Roger Federer backed-On, analysts said. That's an area that they can compete in better in the near term, said Truist Securities analyst Joseph Civello.

Nike Asia executive also recently announced that Nike will roll out new USD $100 S$135-and-under sneakers in countries around the world, as the sportswear giant tweaks its product lineup in a plan aimed at getting sales back on track. Americans are cautious in their spending, especially when it comes to nice-to-have or non-essential merchandise like trendy sneakers.

Top-end Air Force 1 sneakers sell for about USD $150 on Nike's website. In comparison, rival Adidas' three-striped white and black Samba and multi-coloured Gazelle sneakers are priced at USD $100 and USD $120 respectively.

Nike shares slumped Friday ending the day down 19.98 per cent the biggest one-day percentage drop in the stock's history. The company on Thursday reported a surprise sales decline in its latest quarter. Nike has seen sales growth slow as it battles competition from Adidas, as well as the likes of On and Deckers' Hoka brand. Executives also flagged softer traffic in its factory stores that sell discounted shoes and clothing, highlighting increasing pressure being felt by the value consumer.

This is likely a bid to secure some more price-sensitive consumers, GlobalData analyst Neil Saunders said, referring to the new US$100-and-under line. Nike CFO Matthew Friend told investors on Thursday:

Our teams are also attacking opportunities across price points.

Inflation has also affected consumer sentiment. Many consumers are now favoring experiences, like concerts and travel, over discretionary products.

Following earnings, several analysts slashed their price targets on NKE. TD Cowen's John Kernan lowered his target to $75 from $89, citing increased competition and expectations for lower growth in the future. HSBC's Erwan Rambourg lowered his target to $90 from $100, adding that the footwear industry's barriers to entry have fallen much lower.

Nike hasn't fumbled this hard since your middle-school math teacher showed up to homeroom in a pair of Air Force 1s. Shares of the sportswear giant dropped 20% yesterday after Nike announced it expects sales to fall 10% during the current fiscal quarter.

Analysts argue that Nike has made several missteps, including failing to innovate while upstarts like On Running and Hoka raced past the iconic brand. The company has tried to pull away from retailers like Foot Locker and bet on its own direct sales through its website and stores, but it said in April that the strategy was a mistake.

The new plan of attack: Nike wants to focus on releasing new product lines, something it has slacked on in recent years. It also hopes to win back Chinese consumers with the help of new high-end Jordans and the customers it lost to rivals Adidas, Hoka, and On.

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