By Ian Salisbury
Nike stock, to use a sports metaphor, is getting blown out. But with a brand as good as the swoosh, you can always count on a comeback.
Nike will eventually take advantage of its enormous marketing war chest and upcoming events -- including the Paris Olympics opening Friday -- to right its mistakes. For now, investors can pick up the stock at its cheapest price in more than a decade.
It's hard to put a positive spin on Nike's June earnings report. Shares tumbled nearly 20% after the company missed revenue forecasts and lowered its outlook. Nike shares have continued to drift since. On Wednesday they closed at $71.09, down nearly 60% from their 2021 high. As if to add insult to injury, Adidas, Nike's arch rival, has thrived, with shares surging more than 25% this year.
Barron's was among those caught off guard by Nike's woes. We recommended the stock to readers earlier this summer. Still, given Nike's enormous strengths -- including a globally recognized brand, marketing prowess, and enormous ad budget -- we think we were early, not wrong.
Nike investors will need to be patient. But the stock, which had a price-to-earnings ratio of 85 in 2021, is trading at just 19 today. That's well below the S&P 500's 26 and the lowest level Nike has been since 2012.
"Now is not the time to hop off," says CFRA analyst Zachary Warring. "They still have a great balance sheet...They still sell more shoes than anyone else in the world."
Nike's problems are numerous. A large number of them stem from corporate mission-creep at a shoe company that, sometimes fond of comparing itself to Apple, pushed too hard, too fast to grow online sales.
The would-be digital transformation has been led by CEO John Donahoe, former head of eBay, who took the helm in 2020, shortly before the Covid pandemic. Nike has long been blessed with loyal (if not passionate) customers. Donahoe believed the company could juice margins and collect valuable research data by selling to them directly.
In addition to Nike's branded stores and website, the company has long nurtured a portfolio of popular mobile apps, including SNKRS, where it sells limited-releases, and Nike Run Club, where joggers can track and share their workouts.
The plan went well at first thanks to the pandemic. Direct sales jumped 60% between 2019 and 2022. But management drew the wrong lessons and began cutting ties with retailers including DSW, Macy's, and more. It turned out Americans aren't as interested in buying sneakers on their phones as Nike hoped. Wholesale sales tumbled while growth in Nike's direct channel slowed.
While Nike has since re-established many wholesale relationships, it compounded the error by letting newcomers like Hoka and On gain a foothold in the core running shoe market. Shares of Hoka maker Deckers Outdoor are up 26% this year. Those of On Holding AG have gained 46%.
Nike "became so fixated on where they were selling products, they lost focus on what they were selling," says Wedbush analyst Tom Nikic.
Despite all its missteps, Nike still occupies a formidable position. It remains the dominant brand. Its $51 billion in total annual sales are more than twice that of Adidas. And it operates in a $120 billion athletic footwear market that is forecast to grow 40% in the next decade.
Nike also has a huge resources rivals can't match. Last year it spent more than $4 billion on "demand creation" and still ended up with $5.7 billion in profit. (The Hoka brand's entire revenue was $1.8 billion last year, notes Nikic.)
Lost in all the noise have been some recent successes on both marketing and product fronts. In March, Nike launched Air Max Dn, which garnered strong reviews and quickly sold out. Then in April it signed breakout star Caitlin Clark to a $28 million, eight-year contract. WNBA viewership grew 27% last year.
There will be plenty of more chances for Nike to do what it does best. The company has traditionally received a boost from the summer Olympics. For Paris, Nike handed every U.S. athlete a gift bag including the Air Max Dns and several other sneaker models, as well as track suits for media interviews and medal ceremonies.
One more point worth remembering: Fashions come and go, and that applies to sneakers just like other apparel brands.
Adidas has left Nike far behind this year. As recently as 2022, when Adidas was dealing with the fallout from its disastrous Kanye West partnership, the stock plunged 49%. In fact, over the past 15 years, Nike has outperformed in eight, and Adidas seven -- a back-and-forth rivalry any sports fan could appreciate.
Write to Ian Salisbury at ian.salisbury@barrons.com
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July 25, 2024 00:30 ET (04:30 GMT)
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