Nike Stock: Bull vs. Bear

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Today’s economic difficulties have not spared the sports brand Nike (NKE 7.46%). The stock has fallen almost 50% this year. Indeed, headwinds hurt earnings and investors are turning away from consumer spending-related stocks.

But Nike is a stock known for delivering long-term stock market performance. Could this continue? Motley Fool contributors Adria Cimino and Jennifer Saibil present the bullish and bearish cases.

The case of the bear

(Adria Cimino): Nike’s big issues these days are inventory and margins, which could seriously weigh on earnings. Nike is struggling with higher costs due to inflation, supply chain issues and coronavirus disruptions in key China market. And the situation will not improve overnight.

In the recent first quarter fiscal report, Nike said inventory in North America was up 65% from the prior year period. The problem is that some seasonal inventory arrived late and other items arrived too early. Nike is clearly struggling to manage its supply chain in the current environment.

The company has made a decision that is likely to be painful in the coming months: it plans to liquidate some of this inventory. And it does this through markdowns. While this will help Nike make room for new collections, it’s bad news for revenue.

At present, Nike’s gross margin has already slipped 220 basis points in the quarter to 44.3%. The company also expects its markdowns to weigh on gross margin for the full year. In fact, Nike predicts unfavorable exchange rates and higher transportation and logistics costs as well. As a result, for the year, Nike says gross margin will likely decline 200 to 250 basis points from the prior year.

Of course, Nike’s valuation has dropped significantly. It’s positive. But that may not be enough to immediately bring investors back to Nike.

Many investors may want to wait for Nike’s inventory and supply chain issues to settle. That could mean several months of stagnation for the stock — or further declines.

Nike’s long-term vision still looks bright. But the company’s current struggles could hamper share price performance. And that’s not the best news for current or potential investors.

The case of the bull

(Jennifer Sabil): Of course, Nike has faced a series of challenges in the current pressured macroenvironment that are not unique to its retail operations. And there are competitors that are performing better right now. But the big picture shows why you should consider buying Nike stock right now anyway.

First of all, Nike is still the best sports brand by far. Its turnover over the last 12 months is higher than that of all its main competitors, combined. Its revenue is higher than that of almost any other mainstream clothing brand.

It also has the highest brand name recognition among all clothing brands. For example, it consistently ranks as the most popular clothing brand in Piper SandlerAnnual survey Taking stock with teenagers. It returned to No. 1 for most popular clothing brand in the 2022 report, with 30% of responses, well ahead of No. 2, which belongs to American Eagle Outfitters at 7 O’clock%.

It’s even more pronounced in footwear, with Nike taking the top spot according to 60% of respondents, overtaking Converse, which Nike owns, at 8%. Nike is building relationships with the next generation of shoppers, and with its size and brand power, it has created a wide divide.

Let’s move on to valuation. Shares of Nike are trading at 25 times past 12-month earnings, its lowest valuation in five years.

NKE PE report given by Y-Charts

Given its stock price, 25 doesn’t seem like an incredibly low price-to-earnings ratio. It is also above S&P500 average of 18 years, against 30 a year ago with the fall of the market. The high valuation reflects investors’ confidence in Nike’s ability to weather the current pressure and deliver shareholder value for many years to come.

Bullish or bearish?

In the short term, Nike stock might not be the biggest winner. The business again has obstacles to overcome. But over time, Nike has what it takes to win.

A strong balance sheet and loyal fans are two things that should serve the company well. Considering this, today’s valuation represents a good entry point for long-term investors.

Jennifer Sabil has no position in the stocks mentioned. The Motley Fool holds positions and recommends Nike. The Motley Fool recommends American Eagle Outfitters. The Motley Fool has a disclosure policy.

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