Nike (NKE 1.19% ) stocks are still down around 20% from 52-week highs set in January 2020, even after the overall market rebound in recent days lifted stocks 34% from lows set last week. Like many other retailers, the shoe and apparel maker and seller is facing headwinds related to efforts to stem the coronavirus pandemic.
The company is taking steps to address the issues and working to emerge stronger on the other side of this situation, and it has $2.8 billion in cash to help it survive in the meantime. During the company’s third quarter earnings conference call on Tuesday, Chairman and Chief Executive Officer John Donahoe said, “We know that it’s times like these that strong brands become even stronger. And I sincerely believe that no one is better equipped than Nike to navigate the current climate.”
Let’s look at three reasons why this short-term downturn could be an opportunity for long-term investors interested in the stock.
1. First lessons learned from the coronavirus epidemic
Prior to the outbreak, the company’s products were selling exceptionally well in China, with several quarters of double-digit growth. Even in its last quarter, sales were trending up double digits until the outbreak halted the momentum.
Due to the pandemic, the company first closed all of its stores in China, then in South Korea and Japan. Today, 80% of its more than 5,000 stores in China are back up and running, with the company reporting strong customer demand and high traffic.
Importantly, the company said it learned lessons about how to respond effectively to the outbreak in China, is now applying those lessons in Japan and South Korea, and is seeing early momentum in these markets. The strategies will most certainly come in handy as most of its stores outside of China, South Korea and Japan are all temporarily closed.
2. On the right side of the health movement
Before the coronavirus outbreak, healthy living was gaining momentum around the world. Now, in the aftermath of the crisis, I would not be surprised to see this trend accelerating. Nike will benefit because all of its business encourages an active lifestyle.
One would imagine that after weeks spent at home, people around the world will flock to workout centers like it’s New Year’s resolution 10x. The increase in exercise around the world is expected to stimulate demand for Nike products.
Granted, there will be a drop from the initial increase, but the level of activity will likely remain at high levels and increase from there.
3. Incredible growth in digital sales
By closing retail stores around the world, Nike has pushed customers to order online. On his third quarter conference call, Chief Financial Officer Andy Campion said, “Demand for Nike Digital has been extraordinary, with Nike Digital Commerce sales over the past few days approaching peak holiday levels, growing by triple digits. .”
In its most recent quarter, digital sales were up 36% from the same period a year ago. Additionally, the company’s recently launched Nike app in China has racked up five million downloads and digital sales have grown by triple digits in the country.
Strong online sales demonstrate the resilience of demand for Nike products, which is a great sign for shareholders.
What this means for investors
The company saw an opportune time to buy back its shares last quarter, spending $957 million on buybacks. Nike paid an average price of $100 for each of these shares. It would be reasonable to infer that the company would believe its shares are currently undervalued at around $84 per share at the time of writing. Additionally, the company has $11 billion remaining on a board-approved buyout program, which means you could see massive buyouts.
Falling stock prices allow long-term investors to pick up shares of this incredible consumer discretionary stock at discounted prices. Importantly, since no one knows how long the pandemic will last or how severe its effects will be, an averaging dollar cost strategy would be wise.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.