Even the mightiest sometimes stumbles, and the iconic shoemaker’s stock Nike (NKE 2.53%) crashes in 2022. The stock is down more than 34% year-to-date, making it the worst performing stock on the Dow Jones Industrial Average.
Although it has rebounded from its lows, Nike’s recent earnings report shows it is experiencing turbulence just as consumer spending is slowing. The question investors need to ask is whether the stock’s reduced valuation makes it a buy, or should they wait because there’s more air under the Air Jordans maker?
Inventory that accumulates
Nike was trending lower long before it released its fiscal 2022 fourth quarter results in late June, and that report sent stocks tumbling on the news. The big concern was inventory accumulation, as rampant inflation, high gas prices, rising interest rates and a looming recession all signal consumers are cutting back on discretionary spending.
This was reflected in Nike’s results, with inventory jumping 23% even as sales fell 1% and earnings per share fell 3% for the period. Perhaps more worrisome was Nike’s warning that it should be more promotional to attract customers as a way to reduce inventory, suggesting further pressure will be put on earnings in coming quarters.
The point was hammered home several times on the conference call, but chief financial officer Matthew Friend told analysts that Nike’s goal is to return to a healthy “attractive market” where consumers more proactively find their way to its products.
It looks like investors will suffer for at least one, possibly two quarters, before equilibrium is reached. Still, if the recession worsens, and some economists believe it does, Nike’s imbalance could last longer than analysts had hoped.
Profits continue to be under pressure
Margin pressure is sure to be with Nike for some time, as the apparel maker said it expects gross margins for fiscal year 2023 to be 50 basis points lower than in 2022. , which were themselves 80 basis points lower than in 2021.
While he expects higher prices and the ongoing transition to a more direct-to-consumer (DTC) business that is helping profits, Nike’s shipping costs alone will hit him with a 100 charge. basis points. Additionally, companies like Nike with significant exposure to the international market will suffer due to the strong US dollar which will impact exchange rates. Nike says currency exchange rates will impact margins by 30 basis points this year.
Although Nike’s DTC move has helped improve margins overall, with the apparel company reporting a 260 basis point improvement, there are limits to how far it can go, and Nike is already back to being a partner with wholesalers, such as connecting its membership program with Dick Sporting Goods.
Nike has a tightrope to walk because, while it values the control it has over customer data, retail partners are expanding the universe of customers it can reach, and that can be a plus. big concern for Nike now.
An always expensive title
Nike is an iconic brand; in fact, it’s the most valuable clothing brand in the world, according to Brand Finance, and it’s been the most valuable brand since tracking these values began. So while its stock should likely enjoy a premium, hitting 29 times trailing earnings, 23 times next year estimates and 36 times free cash flow it produces seems a bit rich.
Bloated inventories, a still tight supply chain, higher costs, margin pressures and a looming recession all point to near-term headwinds that suggest the stock could reach better prices in the quarters ahead. .
Rich Duprey has no position in the stocks mentioned. The Motley Fool holds positions and recommends Nike. The Motley Fool has a disclosure policy.