Facing Numerous Deep Rooted Challenges, Nike is a Risk, but for the Brand’s Lovers It’s a Bargain
Nike (NKE), the global athletic shoe and apparel giant, has significantly underperformed the index over the past three and five years.
This prolonged period of underperformance is unfamiliar to Nike's long-term shareholders. During the past 5 years, Nike went through a significant distribution system transformation, faced significant competitive threats in the running footwear market, and experienced backlash in the Greater China region during the COVID pandemic. In this article, I will analyze Nike's challenges in detail and share my thoughts on Nike's valuation.
The stock price decline is justified to some extent. Nike's revenue has increased mildly since FY2021. However, Nike's margin has declined from 17% to just above 10% . This is why Nike's EPS has stayed almost flat compared to FY 2021.
Facing numerous challenges, Nike replaced John Donahoe with a Nike veteran Elliott Hill as the company's CEO. Investors initially cheered Hill's return as Nike's stock jumped 7% on the announcement. However, enthusiasm quickly waned as Hill warned investors about the transitional challenges during the Q1 FY 2025 call.
From a valuation perspective, Nike's current price appears to have reflected a considerable degree of pessimism. Currently, the stock is trading at a P/E ratio that is close to the 15-year low. This low cyclically adjusted P/E suggests that the market is pricing in a significant amount of uncertainty about Nike's future prospects.
However, with the return of Elliott Hill, Nike may have a chance to get back to growth. At the current price, Nike seems like a bargain for patient investors who are willing to bet on the company's long-term prospects.
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