From an instinctual standpoint, athletic apparel and sports equipment manufacturer Nike (NYSE:NKE) appears to be a hard Sell. Following a disappointing earnings report, investors seemingly couldn’t rid themselves quickly enough of NKE. Nevertheless, investors should also keep in mind that the discretionary retail brand powerhouse may soon enjoy economic and monetary policy tailwinds. If so, NKE stock could jump higher, factoring into my contrarian bullishness.
Pick the best stocks and maximize your portfolio:
- Discover top-rated stocks from highly ranked analysts with Analyst Top Stocks!
- Easily identify outperforming stocks and invest smarter with Top Smart Score Stocks
NKE Stock Admittedly Suffered a Black Eye
While a blue-chip stalwart like NKE stock deserves to be framed under a long-term context, you can’t ignore the immediate impact, especially one as meaningful as an earnings report. Specifically, Nike’s second quarter of Fiscal 2024 represented a disappointment. Predictably, investors rushed for the exits.
According to Vince Condarcuri, the first warning stemmed from the mixed nature of the Q2 report. Yes, earnings per share landed at $1.03, which beat analysts’ consensus view of 84 cents per share. And sales did rise by 1% on a year-over-year basis to hit $13.4 billion. However, this figure dipped by 1% on a currency-neutral basis. As well, the end result missed analysts’ expectations by $40 million.
Not helping matters was that in Q1, Nike posted sales of $12.94 billion, which fell a bit short of the $13 billion consensus target. Therefore, Wall Street worried that this was the beginning of a bad trend.
To be fair, it wasn’t all doom and gloom. Condarcuri noted, “NIKE Direct revenues and NIKE Brand Digital sales increased 6% and 4%, respectively, on a reported basis. In addition, the company’s gross margin increased by 170 basis points to 44.6%.” This latter point is significant because it demonstrates the pricing power underpinning NKE stock; that is, Nike doesn’t always need to resort to margin-killing discounts and promotions.
Still, what really may have driven NKE stock southward is management’s expectations of the future. Pointedly, the leadership team anticipates full-year sales to grow by only 1%. That contrasts rather sharply with the prior estimate of mid-single-digit growth.
Although the Federal Reserve aggressively attacked inflation through higher interest rates, the pace of rising prices has been stubbornly elevated throughout much of the past year. Combined with the high borrowing costs, NKE stock suffered due to the dark clouds against the consumer economy.
However, that might change in 2024.
Shifting Fundamentals Could Favor Nike
As TipRanks contributor Nathan Reiff mentioned, NKE stock looks enticing despite the ugly drop following earnings. A major catalyst contributing to the bullish thesis is that Nike “seems to have found continued success in its direct-to-consumer approach.” That’s a solid company-specific driver. When combined with potentially positive fundamentals, the sports apparel brand could be a winner this year.
Throughout most of 2023, one of the major headwinds for the consumer discretionary space overall was the rising dollar value. Looking at the dollar index (based in real terms), the benchmark increased from 114.06 points in January 2023 to 117.37 points in October 2023. In fairness, since October, the index declined. Still, this doesn’t change the fact that the greenback effectively increased in value compared to other currencies.
And that’s not just a theoretical musing. Between November 2022 and November 2023, the personal saving rate increased from 3.3% to 4.1%. Last year, the saving rate peaked at 5.3% in May, which isn’t surprising. When the dollar rises in value, you have a natural incentive to save money.
However, the general cycle in American life is that money today is worth more than money tomorrow. For you baseball fans, that’s why the Shohei Ohtani contract – which involved a $680 million deferral – raised eyebrows.
Still, the wrinkle is that the Federal Reserve may move to a more dovish or accommodative policy. Policymakers recently hinted at the possibility of interest rate cuts this year. If so, the dollar – all other things being equal – should not be worth more over time.
That means an incentive will exist to do something with the money, including spending it on discretionary items like Nike-branded products. That’s good for stakeholders of NKE stock but not so much for Shohei Ohtani.
Focus on the True Context
Now, one of the main drawbacks of considering NKE stock at the moment centers on its valuation. Frankly, it’s not cheap. For example, NKE stock trades at around 3x trailing-year sales. That’s a bit pricey compared to the underlying retail apparel industry’s price-to-sales ratio of 1.22x.
However, that doesn’t really tell the whole story. For example, Grand View Research stated that the global footwear market size reached a valuation of $387.74 billion in 2022. Further, the sector is expected to expand at a compound annual growth rate of 4.3% from 2023 to 2030, culminating in industry revenue of $543.9 billion.
According to one report from RunRepeat, Nike held 38.2% of the total footwear market in 2022. And given that other market research has long shown Nike’s ever-expanding presence in just this one segment, the dynamic confirms that the brand resonates with consumers.
Admittedly, it’s difficult to ascertain a “realistic” valuation of NKE stock. Nevertheless, the evidence suggests that its overpriced profile requires a broader context before passing judgment.
Is NKE Stock a Buy, According to Analysts?
Turning to Wall Street, NKE stock has a Moderate Buy consensus rating based on 20 Buys, nine Holds, and one Sell rating. The average NKE stock price target is $123.59, implying 19.94% upside potential.
The Takeaway: NKE Stock Should Enjoy Its Second Wind
Despite a recent earnings miss and its lofty valuation, NKE stock could see a rebound due to potential policy tailwinds. A dovish Fed easing interest rates might boost consumer spending and weaken the dollar, both benefiting Nike. The brand’s strong direct-to-consumer approach and dominant footwear market share further bolster its long-term prospects. While NKE seems pricey compared to the retail sector, its premium valuation should be considered in light of its unique brand strength and growth potential.
