Down 21% in 2022, is Nike Stock a Buy It Now?


Nike (NYSE: NKE) is off to a rocky start to 2022. The stock is down 21% in the first two months, and the company is hampered by production disruptions due to the pandemic and its myriad aftermath.

Fortunately, consumer demand for its products is resilient. Nike sells almost everything it can produce and put on the shelves. Let’s take a closer look at the company and consider whether investors should buy the stock decline.

Image source: Getty Images.

Nike aims to do more direct-to-consumer sales

Notably, Nike sells its products in two ways: direct-to-consumer (DTC) through its website and physical outlets, and secondly through wholesale partners like Macy’s. Of course, Nike’s DTC sales are more profitable, mainly because they can sell more products at full price.

Wholesalers ask for discounts and attractive terms to ensure better profit margins. Additionally, at wholesalers, Nike products are displayed alongside those of competitors, giving consumers the opportunity to choose the cheapest product. Not surprisingly, management has implemented a strategy to accelerate its DTC business.

The timing couldn’t be better, given the widespread supply shortages. If Nike has limited inventory and must choose to hold it for sale through its channels or through wholesalers, it chooses the former. Already, the strategy is bearing fruit. In the six months ended November 30, Nike’s gross profit margin increased 230 basis points to 46.2%. If it ends the rest of the year at this margin, it will equal the high of the last decade.

Meanwhile, revenue grew 8% in the six months ended Nov. 30, so Nike isn’t sacrificing sales to achieve higher profit margins. This is a great sign for shareholders, as it typically slows sales growth when a company aims to increase profit margins. From a consumer perspective, the more you see of a company’s products, the more opportunities there are to buy. Nike has done a great job promoting their website and app and enticing potential customers to buy direct.

Not just any Mark can withdraw this movement. Nike executes a strategy that highlights its strong customer loyalty and brand awareness. Indeed, sales have increased from $23 billion in 2012 to $44 billion in 2021. Strategically, this decision increases the company’s bargaining power with wholesalers: improve your conditions or we will reduce the supply of your products. stores.

Selling Nike shares is a buying opportunity

Nike will continue to be challenged by the pandemic caused supply disruptions Short term. Longer term, it is in an excellent position to capitalize as consumers continue to shop online, where the company can capture sales directly at higher margins.

Luckily for potential investors, it looks like the market has yet to price in Nike’s excellent prospects. the Stock trades at price/earnings and price/free cash flow ratios of approximately 33 and 35, respectively. This is roughly the average for the past five years. So, to answer the question I posed in the title: yes, the Nike liquidation is a buying opportunity for long-term investors.

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Parkev Tatevosian owns Macy’s. The Motley Fool owns and recommends Nike. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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