Nike stock tumbles. Just do it and buy the dip?

NikeS ‘ (NYSE: NKE) Shares fell 20% to a four-year low on June 28 after the company released its latest earnings report. For the fourth quarter of fiscal 2024, which ended May 31, the footwear and athletic apparel maker’s revenue fell 2% year-over-year (and was flat in currency-neutral terms) to $12.6 billion and missed expectations of analysts at $250 million. Its diluted EPS rose 50% to $0.99 and cleared the consensus forecast by $0.15 per share.

Did the market react to this top line error? Let’s examine Nike’s recent challenges, its future expectations and its valuation to see if investors should buy its post-earnings dip.

Nike’s revenue growth has fallen

In fiscal 2023, Nike’s revenue grew 16% on a currency-neutral basis. Much of this growth was driven by its direct-to-consumer Nike Direct segment, which grew its revenue by 20% on a currency-neutral basis and accounted for 42% of its top line.

But in fiscal 2024, the company’s revenue rose just 1% on a currency-neutral basis as Nike Direct sales rose just 1%. Nike Direct’s year-over-year revenue growth also slowed in the third quarter and actually fell in the fourth quarter. As a result, its total sales growth stagnated over the past three quarters.

Data source: Nike. Neutral currency base. YOY = year over year.

Nike blamed the slowdown on macro headwinds for its lower-end consumers, weak brick-and-mortar sales in China, uneven demand across the EMEA (Europe, Middle East and Africa) region and soft demand for some from its classic footwear franchises. . The strong dollar, which took 2 percentage points off reported revenue growth in the fourth quarter, is likely to exacerbate this pressure for at least several more quarters.

Nike expects that slowdown to deepen, with a mid-single-digit decline in revenue reported for fiscal 2025, which broadly missed analysts’ expectations for 1.5% growth.

But while Nike stagnates, many of its competitors are thriving and expanding. Analysts expect its Swiss rival ACTIvE (NYSE: ONON) to generate 29% sales growth this year. Lululemon (NASDAQ: LULU)which is selling more shoes as it expands beyond yoga and sportswear, is expected to grow revenue by 12% this year.

During Nike’s conference, CEO John Donahoe said fiscal 2025 would be a “transition year,” in which it begins a “multi-year innovation cycle” and invests in more “consumer-facing activities” to strengthen its brand. Unfortunately, Nike’s post-earnings decline suggests investors aren’t too keen on its turnaround plans just yet.

The story continues

But its margins are stabilizing

On the bright side, Nike’s gross margin increased 110 basis points to 44.6% in fiscal 2024. This expansion was driven by lower freight and logistics costs, as well as price increases for some of its products. its premium. It expects these tailwinds to boost its gross margin by 10 to 30 basis points in fiscal 2025.

These rising margins indicate that Nike still has a lot of pricing power and that it can offset promotional sales of lower-margin value products with stronger sales of higher-margin premium products. That said, On and Lululemon still reported much higher gross margins of 59.7% and 57.7%, respectively, in their most recent quarters.

Nike laid off about 2% of its workforce this year and may continue to cut costs to squeeze more profit from stagnant sales. But reining in spending too aggressively can inadvertently hurt the company’s turnaround strategies.

Nike did not provide full-year revenue guidance, but analysts had previously been bracing for a 2% drop in profits. Based on that forecast — which is likely to be reduced after its bleak earnings outlook — the stock trades at 25 times forward earnings. I would expect that multiple to rise over the next few weeks as analysts cut their earnings estimates.

Nike probably won’t attract many bidders when it’s easy to find faster-growing companies with lower valuations. Lululemon, which is expected to grow its revenue by 12% this year, trades at just 21 times forward earnings.

Just don’t buy Nike (for now)

It might be tempting to buy Nike stock after the recent decline, but I wouldn’t touch it until the company proves its challenges are merely cyclical rather than existential. Nike Direct’s slowdown is concerning and seems to be struggling against resilient competitors like On in certain regions. If Nike doesn’t get its act together over the next few quarters, the stock is likely to go even lower as investors turn to higher-growth competitors.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica and Nike. The Motley Fool recommends On Holding and recommends the following options: long Jan 2025 $47.50 Nike calls. The Motley Fool has a disclosure policy.

Nike stock tumbles. Just do it and buy the dip? was originally published by The Motley Fool