Nike's Share Price Might Double if it Reaches its Pre-Inflation Shock Peak Levels Again
Nike's share (NYSE: NKE), which is a corporation that designs, develops, and markets footwear, apparel, equipment, and accessories, is currently trading at $77 per share (December 16). This is a significant drop from its high of $170 in November 2021, before the inflation shock, representing approximately a 55% decrease. However, the company has potential for growth.
Nike's growth momentum has slowed down following a strong post-pandemic performance, leading to a leadership change with the return of former executive Elliott Hill as CEO. The company reported a 10% year-over-year revenue decline to $11.6 billion in the first fiscal quarter, resulting from drops in digital sales, directly-managed retail sales, and wholesale revenue. Across all geographic regions, retail sales also decreased in the initial quarter. Nike reported diluted earnings per share of $0.70, which is a 26% decrease compared to the previous year.
Nike is expected to announce its second-quarter earnings on December 19th. Revenue is expected to decline by 8-10%, and the gross margin is projected to contract by 150 basis points, indicating a significant earnings per share decline. In recognition of the challenges, management emphasized that the fiscal year 2025 will be a transition period, requiring ongoing innovation and operational improvements. Rejuvenating digital engagement will be a key focus area to recover from the 20% decline in Q1. Nike's stock has fallen almost 28% this year. In comparison, Lululemon's (NASDAQ: LULU) stock has decreased by 23% since the beginning of the year.
Considering the High-Quality portfolio, which has exceeded 91% returns since its inception, might provide a more stable upside than an individual stock. Reaching the pre-inflation shock level for NKE would require a 120% increase from the current market price. Provided below is an estimation of NKE's valuation, which is approximately $91 per share, which is roughly 18% higher than the current market value.
Nike remains the industry leader despite increased competition, benefiting from unparalleled scale, substantial financial resources, and a robust portfolio of high-profile sponsorships and licensing agreements. Nike's gross margin expanded by 120 basis points to 45.4% in Q1, driven by reduced product and warehousing costs, as well as strategic pricing initiatives. Meanwhile, Nike's demand creation expense, which includes marketing expenses, increased by 15% to $1.2 billion, reflecting increased investments in brand marketing efforts during major sporting events.
Notably, NKE stock has underperformed the broader market in each of the last 3 years, with returns of 19% in 2021, -29% in 2022, and -6% in 2023. In contrast, the Trefis High-Quality Portfolio, consisting of 30 stocks, has outperformed the S&P 500 every year during the same period, providing better returns with lesser risk compared to the benchmark index.
Given the volatile current macroeconomic environment, could NKE encounter a similar situation as it did in 2021, 2022, and 2023, underperforming the S&P over the next 12 months, or will it recovery?
In 2020-2021, an increase in the money supply to cushion the impact of lockdowns resulted in a high demand for goods, causing producers to struggle to meet the demand. Inflation rates exceeded 4% late in 2021, while shipping snarls, worker shortages from the coronavirus pandemic, and energy and food prices spurred by the Russian invasion of Ukraine worsened supply issues in early 2022. The Fed began rate hikes in early 2022, and inflation reached a high of 9% in June 2022. The S&P 500 index fell more than 20% from its peak. The Fed's aggressive rate hikes led to an initial recovery in the S&P 500, followed by another steep decline. The Fed continued to raise rates, but improving market sentiments helped the S&P 500 recoup some losses. Since August 2023, the Fed has maintained interest rates to combat fears of a recession and has even implemented a rate cut in September 2024.
During the 2007/2008 crisis, NKE stock and the broader market exhibited different performance trends.
- October 1, 2007: Approximate pinnacle of S&P 500 index prior to crisis
- September 1, 2008 - October 1, 2008: Enhanced market downturn associated with Lehman bankruptcy filing (September 15, 2008)
- March 1, 2009: Approximate lowest point of S&P 500 index
- December 31, 2009: Preliminary recovery to levels before accelerated decline (around September 1, 2008)
NKE and S&P 500 Performance During 2007-08 Financial Crisis
NKE stock dipped from around $15 in October 2007 (crisis apex) to nearly $10 in March 2009 (market base), suggesting a loss of roughly 30% in pre-crisis value. It climbed from the 2008 financial crisis to approximately $17 in early 2010, increasing around 59% between March 2009 and January 2010. The S&P 500 Index faced a decline of 51%, plummeting from levels of $1,540 in September 2007 to $757 in March 2009. It then rebounded 48% between March 2009 and January 2010, reaching levels of $1,124.
NKE Financial Metrics Over Recent Years
NKE revenues escalated by 15% from $44.5 billion in FY 2021 to $51.4 billion in FY 2024. Concurrently, the company’s EPS enhanced by 5% to 3.78 in FY'24. Nike’s profit margins have remained within a narrow band due to its long-established nature of business. Nevertheless, its gross margin amplified 110 basis points to 44.6% in fiscal 2024. Improved freight costs and elevated prices for premium merchandise contributed to this growth.
Conclusion
The Federal Reserve's initiatives to curb escalating inflation rates are bolstering market optimism. We anticipate NKE stock to exhibit substantial growth once its turnaround plans gain traction.
Exploring the performance of its rivals can be instructive. NKE Peers demonstrates Nike’s stock performance relative to competitors on significant indicators. You can additionally inspect comparative analyses for businesses across industries at Peer Comparisons.
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Nike's projected decline in revenue for the second quarter could negatively impact its stock valuation, which is currently estimated at around $91 per share. This is lower than the company's high-quality portfolio's expectation of reaching the pre-inflation shock level for NKE, requiring a 120% increase from the current market price.
Despite Nike's underperformance in the last three years, it remains the industry leader with unparalleled scale, substantial financial resources, and a robust portfolio of high-profile sponsorships and licensing agreements. This could potentially position it for a strong recovery once market conditions improve.
