Nike (NYSE: NKE) is among the most recognizable brands in the world. Valued at a market cap of $170 billion, Nike stock has returned 293% to shareholders in the last decade, compared to the S&P 500 gains of 231%. But the retail giant has grossly underperformed markets in the last three years. Since July 2020, NKE stock is up just 15%, while the S&P 500 index is up almost 50%.
Let’s see if Nike is a good stock to buy right now.
Nike stock disappoints in fiscal Q4 of 2023
Shares of Nike fell last week after the company announced fiscal Q4 of 2023 results that ended in May. The company reported sales of $12.8 billion, an increase of 5% year over year. It was, however, better than estimates of $12.6 billion. Comparatively, adjusted earnings per share fell 27% to $0.66 per share, also below consensus estimates of $0.67 per share.
Nike Direct saw sales increase by 15% to $5.5 billion as the company continued to shift away from its wholesale distribution channel. Additionally, wholesale revenue was down 2% at $6.7
billion.
Nike generates two-thirds of total sales from footwear, which were up 16% year over year in the last 12 months. However, footwear sales were up just 10% in Q4 of fiscal 2023.
Direct-to-consumer sales also allow Nike to benefit from higher profit margins. However, an inflationary environment which led to a rise in input costs and higher markdowns, meant Nike’s gross margins fell by 140 basis points to 43.6% in Q4. Nike’s operating expenses surged by 8%, meaning its operating income fell 17% to $1.22 billion.
Nike Direct CEO John Donahoe stated, “Nike's strong results make clear that our strategy is working. [Fiscal year 2023] was a milestone year for Nike as our unique advantages continue to drive competitive separation.”
Nike expects sales between sales in fiscal 2024 to grow by mid-single-digit percentages. As inflation is likely to cool down, its gross margins might expand by 145 basis points year over year, allowing the company to end fiscal 2024 with adjusted earnings of $3.85 per share.
Is NKE stock a buy right now?
Priced at 28 times forward earnings, Nike stock trades at a premium. Investors remain worried about the management’s outlook on a higher cost base, which could negatively impact profit margins.
Analysts expect Nike’s earnings to rise by 7.5% annually in the next five years, which suggests the stock is overvalued. Nike also expects favorable transportation costs and sell-through merchandise prices to impact the bottom line positively.
Nike is a retail behemoth with over $51 billion in total sales. But it remains vulnerable to macro shocks and uncertainties. For instance, the cost of living crisis in the U.K. and Europe has resulted in soft demand for Nike in recent quarters.
Alternatively, Nike’s focus on digital expansion and improving inventory levels is likely to re-accelerate profit margin improvement.
In a nutshell, NKE stock seems expensive at its current price, which means investors should not be overly bullish on this retail heavyweight.
Analysts remain bullish on Nike stock and expect shares to surge over 20% in the next 12 months.
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