Is Nike a buy now?

A small uptick has broken the decline that sportswear brand $Nike(NKE)$ has experienced for over a month. Many investors are still reeling from the March financial report.

It must be said that there is a significant difference in performance among companies in the consumer discretionary sector, which can be attributed to the following factors.

Firstly, different industries are affected differently in an inflationary cycle.

The industry determines the foundation of a company, so even the most outstanding companies in their respective industries find it difficult to resist the impact of inflationary cycles. That's why consumer discretionary is also known as "cyclical" sectors, including restaurants, automobiles, e-commerce, travel, home furnishings, and apparel, among others.

Secondly, different companies have different capabilities in dealing with inflation. Supply chain management and cost control, for example, vary from company to company.

Although there are similarities, the few percentage points of difference can significantly influence investors' choices. Take the sportswear industry, for instance. Although Nike (NKE) is the leader, it falls short in terms of brand effect and growth potential compared to lululemon athletica (LULU). Many investors also compare horizontally within the industry and choose stocks with more potential.

LULU vs NKE （2022-now）

Nike faces several challenges. Firstly, exceeding expectations in performance does not necessarily indicate strong potential. Companies can achieve "double exceeding expectations" through expectation management after each financial report, but investors are more concerned about the company's guidance. Despite NKE's earnings per share (EPS) exceeding expectations in the past eight quarters and revenue exceeding expectations seven times, with one time being in line, the stock price has still fallen by 31% from its peak in 2022 and nearly 50% at its highest decline. This indicates poor performance expectations or a downhill trajectory.

Secondly, there is weak pricing during inflationary cycles. The change in consumer price index (CPI) for apparel is far behind the overall index and even further behind essential products like food. As non-essential goods, apparel is one of the products that consumers are more likely to sacrifice during inflationary cycles. Consequently, NKE has experienced an accumulation of unsold new products, and destocking has been emphasized in recent quarters.

Of course, Nike's footwear category, which is its pride, still performs well, but pricing for other products, including apparel and sporting equipment, cannot compare to pre-pandemic levels. Inventory has been a problem throughout 2022 and only started to improve after entering 2023, but at the cost of promotions and sacrificing profit margins.

Thirdly, the influence in the Greater China region has declined. Unlike blaming it on Covid-19, we believe that the decline in Nike's brand influence in the Greater China region is a significant factor. One reason, as we have mentioned before, is the boycott of Xinjiang cotton, which creates a conflict between business and politics and leads to opposition from consumers. Another reason is the shrinking differentiation of brands in the live streaming e-commerce environment.

In today's diverse clothing brand landscape, if Nike still has an irreplaceable advantage in footwear, it remains unclear what supports Nike's apparel. Nike itself hasn't figured it out.

It's worth noting that the Greater China region is a crucial area for Nike. If one of its primary growth drivers loses hope, investors will undoubtedly revise their long-term growth targets. Therefore, its performance since the beginning of this year has been weaker than the overall market.

Can the significant rise on June 14th represent a future trend?

First of all, the release of May's CPI and the FOMC meeting have relieved some pressure for investors, providing an opportunity to cash in on previously high-performing companies and possibly bargain-hunt certain ones. NKE has experienced a 10% drop in the past month and has been underperforming in the entire discretionary consumer sector. Whether it's short covering or long positions adjusting, there is motivation to operate from the current position.

However, NKE's long-term trend remains unchanged. If the Federal Reserve continues to raise interest rates and food and rent expenses continue to dominate American households' budgets, coupled with increased competition in the Greater China region and a decline in brand influence, even with skillful operational techniques to improve profits, NKE will struggle to address the larger issue of sustainable growth.

If you intend to invest in the apparel sector of discretionary consumer goods, after comparing multiple companies, you may find NKE less enticing than initially thought.