After Earnings, Is Nike Stock a Buy, a Sell, or Fairly Valued?

Nike NKE released its fiscal fourth-quarter earnings report on June 27. Here’s Morningstar’s take on Nike’s earnings and stock.

Key Morningstar Metrics for Nike

• Fair Value Estimate: $124.00
• Morningstar Rating: 5 stars
• Economic Moat: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Nike’s Q4 Earnings

• Lower sportswear demand has affected sales of Nike’s classic franchise. Sales are not as strong as they were a few years ago. The department stores have been reporting negative sales numbers, a result of macro conditions and Nike’s own issues.
• Nike has fallen behind some competitors as sportswear demand has slowed.
• We regard the share price weakness as an opportunity for long-term investors, given that the wide-moat sportswear leader stands to benefit over the next few years from its planned marketing and product initiatives and the growth of the global market.

Fair Value Estimate for Nike

We are lowering our fair value estimate of Nike’s stock to $124 per share from $129. The company’s fiscal 2024 fourth-quarter earnings per share of $0.99 surpassed our $0.88 estimate, and its 13.3% EBIT margin beat our estimate by 80 basis points on expense cuts and limited discounting. However, its quarterly sales fell 2%, and it guided to a mid-single-digit sales decline in fiscal 2025 due to uncertain economic conditions in key markets and weak demand for some lifestyle and footwear products.

For fiscal 2025, we have lowered our sales forecast to a 5% decline from 1% growth, and our EPS forecast to $3.09 from $3.95. Our fair value estimate implies a fiscal 2025 price/earnings ratio of 40 and an enterprise value/adjusted EBITDA ratio of 29.

Although Nike’s fiscal 2024 gross margin of 44.6% was below fiscal 2022′s 46% on weak sales of some products and poor digital sales, we forecast a return to 46% in about two years as its sales growth returns in fiscal 2026 and its inventory situation improves. In the long run, we project gradual improvement to about 48% in 10 years. The firm may increase gross margins through greater production and distribution efficiencies, its shift to digital sales, product mix changes, and price increases.

Read more about Nike’s fair value estimate.

Economic Moat Rating

We assign Nike a wide moat based on its brand intangible asset. It is the world’s largest athletic apparel and footwear company, with over $50 billion in annual revenue. Its sales have increased in 13 of the past 14 years, with the pandemic-affected fiscal 2020 as the sole exception.

Nike’s adjusted returns on invested capital, including goodwill, have averaged 35% over the past five fiscal years, well above our 8.6% estimated weighted average cost of capital. Moreover, we forecast that the company’s annual adjusted ROICs, including goodwill, will average 39% over the next decade and exceed its WACC for at least the next 20 years. Nike’s ROICs possibly get a boost from the firm’s outsourcing of production to third-party factories, but we believe its returns on investment would be high even if its asset base were larger.

While Nike’s financial resources and relationships with suppliers likely facilitate production investment unavailable to others in the short term, any advantage in this area is likely transitory. Competing producers can probably gain access to similar technologies. Moreover, much of apparel manufacturing remains manually intensive. Products competing with Nike’s footwear and clothing are widely available. As such, we do not believe there is any network effect or efficient scale in the apparel business, and switching costs are nonexistent.

Read more about Nike’s economic moat.

Financial Strength

We believe Nike is in excellent financial shape to weather the apparel industry’s many challenges, including elevated inventories, higher costs, a strong US dollar, and the impact of inflation on consumer spending. At the end of fiscal 2024, Nike’s $11.6 billion in cash and short-term investments exceeded its debt of $8.9 billion. In addition, the firm had undrawn short-term credit facilities of $3 billion and a separate $3 billion commercial paper facility.

Most of Nike’s long-term debt does not mature until after 2028, but it has significant endorsement commitments of more than $1 billion per year. With its investment-grade credit ratings, the firm could easily increase debt for stock repurchases or other uses. It may also make acquisitions, although these are likely to be technology-focused and fiscally immaterial.

Read more about Nike’s financial strength.

Risk and Uncertainty

Our Uncertainty Rating for Nike is Medium. The company struggled with supply chain problems and excess inventory in 2021-22, but it has made progress in fixing these issues.

Nike is vulnerable to weakness in US physical retail. Department stores that carry its products have been downsizing and cutting orders. However, the firm should be able to make up for slowness in some retail areas through direct-to-consumer sales.

As a global business, Nike is affected by economic conditions in many parts of the world. Consumer spending on the company’s products has been uneven due to inflation, war, currency movement, trade restrictions, and other issues.

The athleisure trend and growth in activewear have attracted new competition. While Nike is the market leader in many categories and markets, some competitors have found success with innovative running shoes (On, Hoka One) and fashionable specialty products (Lululemon Athletica LULU). Nike is under constant pressure to release new products that resonate with consumers, and it may miss sales projections if it fails to do so.

We do not believe any environmental, social, or governance risks that affect Nike will materially impact its financial results or investment prospects. Nonetheless, the firm tends to be a lightning rod for controversy due to its high visibility.

Read more about Nike’s risk and uncertainty.

NKE Bulls Say

• Although uneven of late, the global sportswear market should expand, especially in Asia and other developing areas. As the share leader in most countries, Nike is positioned to benefit.
• Nike’s restructuring efforts to achieve $2 billion in cost cuts and its “Triple Double” strategy (increased innovation, direct-to-consumer sales, and speed) should allow for improved margins.
• Somewhat depressed lately, we anticipate Nike’s gross margins will rise through automation, e-commerce, and higher prices. Nike is pulling back from undifferentiated retailers to increase full-priced sales.

NKE Bears Say

• As a worldwide business, Nike has felt the effects of the war in Ukraine, shipping delays, currency volatility, and inflation. These and other issues could continue to impact its results.
• The Chinese sportswear market is increasingly competitive. Nationalistic sentiment has boosted native brands, and international brands like Lululemon have expanded. Nike must continue to lead this market to meet long-term profit goals.
• Nike’s dominance in running shoes has been challenged by the success of relative newcomers like Hoka and On. It has fallen behind some others in innovation.

This article was compiled by Leah Breakstone.