Nike Inc. (NYSE:NKE) is like a sports team that has had a bad year and needs to rebuild. What has the stock up only 2%, against a 14% rise in the S&P 500 so far in 2017, is a one-two punch of adidas AG (ADR) (OTCMKTS:ADDYY), which has been taking market share, and Amazon.Com Inc. (NASDAQ:AMZN), which has decimated its sales channels.
The result has been growing skepticism that NKE stock can grow, a view telegraphed and supported by first quarter earnings that were down 22% from a year ago, blamed on lower North American wholesale revenue.
Our Bret Kenwell recently looked at the Adidas damage, where just a little more than half the top-selling shoes are now Nikes, against nearly all of them a year ago. Our Vince Martin has described the new traders’ pessimism.
But if you’re patient and the economy does not collapse, chances are your patience will be rewarded.
Rebuilding Channels for NKE
The rebuilding of the channel is already underway, as that weak first quarter report described. Nike is continuing to grow in international markets, and its NIKE Direct channel is doing well with the weakness mainly confined to its Converse brand, down 16%. Nike itself says foreign exchange deserves more blame for its present weakness than its margins, which it admits are down.
Analysts have yet to abandon the stock, with more still giving a positive buy or overweight rating than a hold. This despite continuing weakness expected in the November quarter, due to be reported Dec. 26, earnings of just 39 cents per share on revenue of $8.41 billion, against earnings of 50 cents per share a year ago.
Just buy it, says Pinxter Analytics, which sees international expansion and technology as growth drivers, and its recent decision to sell through Amazon as positive for North America sales.
Faith in the Brand
Luke Lango believes NKE stock will hit $60 per share within a year because it is copying what Adidas did right and is one of the world’s great brands.
The opening of basketball season, where Nike is now the NBA’s official jersey supplier and a new push for women’s business combine with a strong balance sheet (Nike’s cash on hand is nearly equal to all its debt) to herald a strong Christmas.
Clearing out old merchandise will deliver a short-term hit to margins, but also clears the deck for new merchandise and its new ways of doing business. For now, the NCAA basketball scandal involving payoffs to players is focused on Adidas.
The Bottom Line on NKE Stock
Nike is almost never a cheap stock. Even at its current price it is selling at 22 times earnings.
But like the New York Yankees, it tends to come back from losses. Even discounting the last two years of stock weakness, the five-year performance of Nike stock is still much better than that of the S&P 500, with Nike shares up 120% in that time, against a 75% rise in the averages.
Nike is also a global brand, not just a U.S. company. The ongoing weakness of the U.S. dollar means those overseas earnings, which are growing, are worth even more when they’re brought home. If the U.S. economy falters, Nike stock may not fall much further.
Besides if Nike can’t beat back German competition, who can? Nike has always bounced back in the past. The stock is relatively cheap. Few believe its current problems can’t be solved.
What’s the worst that can happen? Maybe this downward dog decides to buy Lululemon Athletica Inc. (NASDAQ:LULU)? It can, without even diluting its own stock.
If you’re a young investor with Nike kicks on your feet, in other words, now is a good time to buy.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
