I'm sure most readers are familiar with Nike (NYSE: NKE) . The leading sportswear business, which sells popular apparel and sneakers, has a global presence. And it's been atop the industry for many decades.
But Nike has been dealing with some major challenges, which revealed themselves recently when the company reported its latest financial results. As of this writing, the consumer discretionary stock trades 58% below its peak price. And it's down a gut-wrenching 31% just this year, propelled by the recent update.
You might be thinking about buying Nike shares. Before you do, here are three must-know facts.
Demand problems
During the three-month period that ended May 31, which is Nike's fiscal 2024 fourth quarter, the business reported revenue of $12.6 billion. This was down 2% year over year and missed consensus analyst estimates. Even worse, the executive team downgraded guidance, as it now expects Nike's fiscal 2025 sales to decline by mid single digits.
Management highlighted macro pressures, uneven consumer trends, and softer digital sales. But the goal is to drive demand. "We're sharpening our focus on sport, accelerating our pace and scaling of newness and innovation, driving bigger, bolder storytelling, and elevating the entire marketplace to fuel brand distinction and being the path of the consumer," CEO John Donahoe said on the Q4 2024 earnings call .
Nike's top-line weakness might have forced management's hand at initiating a multi-year plan to cut costs by $2 billion. Rightsizing the expense structure to better match subdued demand seems like the right financial move. So far, it seems to be helping, as Nike's Q4 net income totaled $1.5 billion, up 45% versus the year-ago period.
Economic moat
Since its founding in 1964, Nike has focused intensely on building up its brand recognition. Impactful marketing campaigns, high-profile athlete endorsements, and unrivaled product innovation helped make the company the leader in the sports apparel and shoe market. And this is precisely what makes up Nike's economic moat .
However, it's safe to say that Nike's brand is certainly being tested right now. The current situation is even more alarming when you realize that a smaller rival, Lululemon Athletica , grew its sales 19% in fiscal 2023 (ended Jan. 28), with the leadership team forecasting an 11% to 12% jump in the current fiscal year.
The good news, however, is that Nike still appears to have pricing power for some of its most in-demand products. During the latest fiscal quarter, the gross margin expanded year over year to 44.7%, driven partly by "strategic pricing actions." Couple this with management's intention to boost innovation, and at least Nike does still possess some positive attributes.
Low expectations
On the one hand, it's easy to believe that Nike will figure it out and get back on track, with rising sales and profits over the long haul. To its credit, the business has stood the test of time, which is a rarity in the world of fashion. Expecting things to revert back to normal seems reasonable.
If you believe this, there might be a rare buying opportunity, but only if you have the patience to wait for a turnaround. Shares trade at a price-to-earnings ratio of just over 20. This is the cheapest valuation in the past decade, indicating the heightened pessimism there is for Nike and its prospects. Even small improvements could push the stock price up.
On the other hand, I think buying Nike right now is a risky endeavor. It's anyone's guess how long it will take until things start to change for the better. The correct course of action, in my opinion, is to monitor the company. When Nike is on better footing, then perhaps it's time to consider buying.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica and Nike. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy .
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