3 Must-Know Facts Before You Buy Nike Stock

As one of the largest sports apparel and footwear businesses on the face of the planet, Nike (NKE 0.70%) is well-known not only among customers worldwide but within the investment community as well. Regarded as a blue chip stock, Nike is even included in the Dow Jones Industrial Average.

Despite its storied history spanning many decades, shares of this consumer discretionary business haven’t been kind to investors. Nike is currently 42% below its peak price, after it tanked 7% in 2023.

Before you go rushing to scoop up this stock, here are three facts you need to know.

1. The brand is key

This probably doesn’t shock anyone, but Nike’s strong brand presence is its main competitive advantage. It’s the single factor that separates this company’s products, which are really just commoditized clothes and shoes, into a profitable revenue stream. If we look out even 10 or 20 years from now, I’m positive that Nike’s success will be predicated on how relevant the brand stayed.

This business is one of the best marketers in the world. Powerful marketing campaigns attempt to resonate and build deep connections with customers, while exuding a winning mentality. Superstar athletes help the cause. From Michael Jordan in the 1980s (a partnership still thriving today), to LeBron James, Tiger Woods, Serena Williams, and Cristiano Ronaldo more recently, Nike is known for its high-level athlete endorsements. This keeps the brand’s visibility extremely high.

The result is a gross margin that has averaged 44.7% in the last decade, showcasing customers’ willingness to pay up for what Nike is selling. And there is some pricing power here. In the fiscal 2024 second quarter (ended Nov. 30, 2023), average selling prices increased, according to CFO Matt Friend.

Management is focused on maintaining the brand image, which is the right strategy. The goal is to try to grow direct-to-consumer sales and rely less on ineffective wholesale retailers.

But perhaps the best move is to continue investing in Nike’s digital foundation. The company’s various digital apps have hundreds of millions of members in total, providing the business with a way to directly engage and communicate the brand’s message.

2. Weakness in China

Five years ago, the Greater China market was Nike’s fastest-growing by far. The booming Asian economy, with its massive and expanding middle class, is attractive to many consumer brands looking to jump-start growth. Nike has had a presence in the country for a long time.

But the business has hit a rough patch. In Q2 2024, sales in Greater China were up just 4%. Not only is the Chinese economy sluggish right now, while at the same time still stabilizing following the pandemic’s disruptions, but Nike’s competition is getting stiffer. There are local home-grown brands, like Anta Sports Products and Li Ning, that are finding great success among the population. Consequently, Nike may be losing share in a country that’s supposed to be its most important market outside the U.S.

3. Coming up short

When reporting fiscal 2021 fourth-quarter results, Nike executives laid out a long-term financial outlook, which stated some high-level goals the business hoped to achieve by fiscal 2025. Revenue growth of high single digits to low double digits is the goal that I’ll call out, as it’s directly influenced by demand trends.

As we are currently halfway through fiscal 2024, it’s discouraging for investors to know that the company is coming up well short of this target. Revenue was up by just 1% in the latest quarter. It increased by 4.9% in fiscal 2022 and 9.6% in fiscal 2023. Management expects sales to increase by 1% for the current year. Unless there’s a miraculous acceleration in fiscal 2025, Nike won’t hit its revenue goal.

Investors looking to scoop up shares of this industry leader must understand that the company is dealing with some issues right now. However, its brand has proven to be durable, and this is a key asset for the business. If you’re still a long-term believer in the stock, then it might be a good idea to be a buyer today. Otherwise, wait until things improve.

Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends 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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