Last year was a surprisingly good one for U.S. stocks, as the S&P 500 Index ($SPX) rose a healthy 24% in 2023. However, Nike Inc (NKE) was a notable laggard, and finished the year among the worst-performing stocks on the Dow Jones Industrial Average ($DOWI).
The stock's performance took a particular turn for the worse in December, when the sneaker giant released its earnings for the fiscal second quarter of 2024. Not only did the company miss revenue estimates for the quarter, but it also lowered its full-year revenue growth forecast to a mere 1%, down from the previous guidance of mid-single-digit revenue growth. It was the second consecutive quarter when Nike missed revenue estimates, marking the first time since 2016 when it missed sales estimates for two straight quarters.
Nike stock hit an all-time closing high over $173 in November 2021, and is currently trading around 41% below its 52-week highs. The price action looks dismal, especially considering the fact that the S&P 500 is trading near its all-time highs.
Nike is the most popular sneaker brand globally, and is the market leader in the segment. The stock lost 30% in 2022, which took place amid the broader market meltdown - but the underperformance in 2023 came despite strong markets. Will 2024 be any better for Nike stock, and can the shares finally recover this year? Here are the key factors at play.
Nike Stock 2024 Forecast
Wall Street analysts rate Nike stock as a “Moderate Buy.” Of the 28 analysts covering the stock, 16 rate it as a “Strong Buy,” while 3 call it a “Moderate Buy.” Eight analysts rate NKE as a “Hold,” while 1 analyst has given it a “Strong Sell” rating. Nike’s mean target price of $125.58 is 19% above current prices.
Nike stock trades close to its Street-low target price of $104, while the Street-high target price of $150 represents implied upside of 42%.
After Nike’s fiscal Q2 earnings in December, CFRA and Cowen downgraded the stock by one notch to “Sell” and “Market Perform,” respectively. However, some experts believe that the sell-off in Nike stock is overdone, as Barclays and Bernstein both named it a top pick for 2024.
Why Has Nike Stock Been Falling?
There are concerns over demand for Nike products in the U.S. – its biggest market – amid slowing consumer spending. Separately, Nike’s sales in the Greater China region have also been weak.
During the fiscal Q2 earnings call, commenting on the toned-down revenue guidance, Nike’s CFO Matt Friend said, “This new outlook reflects increased macro headwinds, particularly in Greater China and EMEA adjusted digital growth plans based on recent digital traffic softness and higher marketplace promotions, life cycle management of key product franchises, and a stronger U.S. dollar that has negatively impacted second-half reported revenue versus 90 days ago.”
Will Nike Stock Recover and Go Back Up?
Notably, while Nike lowered its full-year revenue guidance, the company still expects its gross margins to expand by 140-160 basis points in the year. However, this does not include the charge of up to $450 million that the company expects to recognize in Q3 related to severance costs. These are part of the restructuring plan under which the company is targeting $2 billion in annualized cost savings over the next three years.
The company has also lowered the inventory on its balance sheet, which fell by double digits in Q2. Friend said during the earnings call that “we feel great about our inventory.”
While Nike faces some potent near-term headwinds, I believe the price action has been an overreaction, and the stock should recover in the medium term. The stock trades at 27x forward earnings, and the current multiples are lower than the average multiples over the last three years.
Nike’s Growth Should Recover in Fiscal Year 2025
While the current fiscal year has been problematic for Nike, both sales and profit growth are expected to gain momentum in fiscal year 2025, with analysts forecasting sales growth of 6.7% and earnings per share growth of 18.3%.
The company has lowered inventory significantly, which should help support the pricing environment. It is also embarking on what CEO John Donahoe termed the “start of a multiyear product innovation cycle that will introduce new franchises, concepts and platforms, elevating our full portfolio.”
Overall, I believe that with tepid valuations and an expected rebound in growth in the next fiscal year, Nike is a good buy at current prices, and the shares will eventually recover over the next couple of years.
On the date of publication, Mohit Oberoi had a position in: NKE . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
