Stock Analysis & Ideas

Nike Stock (NYSE:NKE): Compelling Value after Historic Plunge

Story Highlights

Nike stock got clobbered following news of its inventory surge. With margin and supply-side headwinds to continue weighing heavily on future quarters, it’s hard to be bullish. Still, after such a historic plunge, many may be discounting the firm’s ability to stand up to a challenge.

Shares of apparel kingpin Nike (NYSE: NKE) have been clobbered badly this year, down a whopping 46% year-to-date. That’s an excessive decline for any Dow Jones Industrial Average (DJIA) component, let alone for the finest blue chips in the basket. Indeed, analysts are worried about the inventory glut and its effect on margins, moving forward. With a rough quarter in the rear-view mirror, a recession closing in, and significant negative momentum behind NKE stock, it’s tough to go against the grain. Still, I think there’s a lot of value to be had by dip-buyers brave enough to “just do it.”

I remain bullish on shares of Nike while they’re down nearly 50% from their highs. It may be tough to see beyond looming headwinds, but the longer-term fundamentals are still intact.

Inventory markdowns may eat away at nearer-term margins. That said, once conditions inevitably normalize, the focus will be right back to the margin expansion to be had from the company’s direct-to-consumer (DTC) strategy. Unlike inventory gluts, Nike’s DTC push and strengthening brand affinity will have a long-lasting effect on margins.

Nike Stock: Analysts Downgrade Over Swelling Inventory

Analyst downgrades have been coming in fast following Nike’s concerning the first quarter of Fiscal Year 2023. While the quarterly numbers themselves weren’t awful, with per-share earnings coming in at $0.93, a penny ahead of the consensus estimate, it was its inventory that caused many to ring the alarm bell.

As shown above, Nike’s inventory surged 44% in the latest quarter, drawing concern that more price cuts could be in the cards in upcoming quarters. Undoubtedly, recessions do not bode well for the demand for nice-to-have goods like apparel and footwear. Though Nike has an unrivaled brand, it’s hard to resist the gravitational pull of an industry that’s among the most vulnerable to economic downcycles.

The Nike inventory jump didn’t just pave the way for mild downgrades; many Wall Street analysts lowered the bar on their price targets by more than 20%. Some reduced their recommendations from Buy to Hold, though most kept their ratings intact despite the magnitude of the price downgrades.

Baird recently lowered its Nike stock price target to $100 from $127 — a sizeable trim. Barclays also axed its price target to $83 from $110, noting similar headwinds.

The inventory glut is bound to lead to considerable pressure on margins. However, it seems like Nike stock is already priced with a recession in mind. Further, ongoing supply-chain woes and macro risks already seem baked into the share price, with Nike below $100 per share.

At writing, Nike stock trades at a very modest 3.2x sales and 25.6x trailing earnings. Indeed, Nike is seldom this cheap. Even with a “mild” downturn on the horizon, I think the market is making too much of recent headwinds that I view as transitory.

Nike Has Tools to Offset Coming Margin Headwinds

Margin headwinds are scary, but they don’t have to be for a firm like Nike, which boasts enviable brand power. While ongoing DTC efforts are unlikely to offset margin headwinds, I do think easing supply-chain issues and its mobile app can help make a bit of a difference.

The mobile app, in particular, helps Nike better connect with its loyal fanbase. Undoubtedly, special-edition sneaker drops (or releases) with unique colorways are major reasons to download Nike’s app. Its fitness service and other intriguing perks are other reasons to stay within the Nike ecosystem.

Nike’s “Triple Double” strategy, which aims to double innovation, speed, and direct connections, has paid rich dividends. As we enter a tougher macro climate, it’s direct connections that can help Nike limit the pressure pain that comes with inventory markdowns.

Cash-strapped consumers may not have as much money to splurge on the latest and greatest sneakers. However, Nike can tout “special discounts” to its users to keep them engaged. If Nike is going to discount items anyway, it may as well improve upon one of the three pillars (direct connections) in its Triple Double strategy.

If Nike plays its cards right, it can reduce inventory while minimizing margin pressures and beefing up its three “Triple Double” pillars of growth.

Is Nike a Good Stock to Invest In?

Analysts seem to like NKE stock, giving it a Moderate Buy rating. This is based on 16 Buys and 10 Holds assigned in the past three months.

The average Nike price target is $110.83, implying upside potential of 22.8%. Analyst price targets range from a low of $79.00 per share to a high of $185.00 per share.

Conclusion: Management Can Weather the Upcoming Storm

I think analysts were too quick to lower the bar on Nike stock. There are no easy ways around margin headwinds. However, over the long haul, there’s no reason why the firm can’t rise out of this downcycle smarter and stronger.


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