Investor Bill Ackman Increases Stake in Nike: Crucial Facts for Shareholders to Understand
Nike (NKE decreasing by 1.32%) is the largest U.S. footwear and apparel company, hands down. The brand has expanded its reach beyond athletic gear and has become a popular choice for loyal fans worldwide. However, the company has faced significant sales challenges over the past few years. Missteps and unfavorable macroeconomic conditions have contributed to its struggles.
Bill Ackman, the well-known hedge fund manager who runs Pershing Square Capital and is known for taking activist stances, recently increased his stake in Nike. Before adding Nike to his portfolio in the second quarter, his portfolio consisted of only seven holdings. By the end of the third quarter, his holdings had grown to 11, with Nike making up a significant 436% increase in his portfolio, rising from a minor 2.2% to a more substantial 11%.
Nike's stock price has dropped by approximately 30% this year, but there are several reasons to believe it could recover, making now an attractive buying opportunity. Nike currently trades at a reasonable P/E ratio of 22, which could appeal to value investors.
If you're considering following Ackman's lead and buying Nike, consider the following three points:
1. The new CEO has a lot of work to do
Nike faced significant challenges in its fiscal first quarter, which ended August 31. Sales decreased by 10% year over year, and sales from its direct-to-consumer segment plummeted by 13%. Earnings per share also dropped by 26%.
Over the past few years, Nike has withdrawn its products from many of its long-time retail partners to focus on its direct-to-consumer business. This was meant to help the company generate stronger customer loyalty and strengthen its brand presence. The strategy also allowed Nike to cut costs and exert more control.
However, the downside of this strategy was that Nike gear was not available in many stores after the pandemic's social distancing phase subsided, and customers returned to shopping in physical stores. The focus on restructuring also took away attention and resources from the innovation pipeline.
To get back on track, the company recently appointed former executive Eliott Hill as CEO. Hill is a longtime Nike veteran whom management has confidence in, and he has the experience and in-depth knowledge of what makes Nike successful to help the company get back on its feet.
However, the hole Nike has dug for itself is quite deep. The company will need to get back to what it does best while embracing new trends and consumer behaviors. This could be a challenging task.
2. It's the leading footwear and apparel brand
Putting aside its current challenges, Nike has nearly unmatched brand value and a lead so wide that it would be impossible for any competitor to overtake it in the near future. While it's uncertain whether Nike will be able to sustain its success, no one should count it out yet.
Consider Nike's position compared to other major athletic apparel sellers such as Adidas, Lululemon Athletica, Skechers, and On Holding. Nike's revenue is significantly higher than the combined sales of all these companies.
Nike is still the top brand for both apparel and footwear for teens, according to the Piper Sandler Taking Stock With Teens survey.
Ackman isn't investing in a no-name company here. He's investing in a world-class leader in its industry that still has the name, innovation, and culture to hold onto its dominant position and get back to growth.
3. A rebound might take time, so this is a long-term play
Despite Nike's top position in its space, engineering a rebound may take time. In its latest quarterly report, the company did not provide any guidance. We'll have to wait and see how the new CEO maps out the company's path forward.
Some of the declines Nike experienced in its fiscal first quarter were intentional – the expected result of the company pivoting away from some of its previous strategies. For example, Nike decreased the amount of inventory going to its direct-to-consumer channels so that it could shift more to its retail partners. The company is also beefing up its innovation program, which involves cutting some of its legacy products.
Nike is operating in a competitive environment, and competitors like Lululemon and On Holding have gained market share from it in recent years. Management reported that its spring order books were about flat year over year – lower than expected – and warned that the company will have to navigate a challenging period ahead before it can start regaining market share.
Long-term investors might want to follow Ackman into a Nike position, but it's important to keep the position size modest and not expect immediate rewards.
Investing in Nike's stocks could be a strategic move for those seeking long-term growth, given its substantial 436% increase in Bill Ackman's portfolio. Despite facing challenges in sales and the need for the new CEO, Eliott Hill, to navigate its recovery, the company's robust financial position and market dominance make it an attractive prospect for value investors.
In light of Nike's reasonable P/E ratio of 22 and its continued dominance in the footwear and apparel industry, smart finance decisions may involve allocating funds towards this veteran brand, even if a rebound might take time.
