The international sportswear giant Nike (NYSE: NKE) took the decision a few years ago to shake up its operations and initiated efforts to transform its business. The globally iconic brand has focused on expanding its digital channel in hopes of connecting more closely with customers.
Late last week, management announced first-quarter fiscal 2022 results that suggested the fiscal year got off to a rocky start. The stock price fell 6% shortly after the report was released. Much of the reason for this was pandemic-related and likely short-term.
But the quarterly report also allowed management to take stock of its ambitious longer-term transformation efforts. The efforts that management suggests are still achievable.
Nike raises the bar
While Nike’s stated goal is to build a stronger connection with its customers, its ongoing digital efforts are also good for the bottom line. Digital sales increase profit margins as Nike retains the share that would normally go to wholesale partners. They also allow for better price control. The timing of this transformation also aligns with consumers increasingly moving their purchases online.
The success of direct-to-consumer digital transformation may in part be what gave management confidence at the end of fiscal 2021 to raise long-term goals for several crucial business metrics. Previously, the company targeted mid-high-single-digit revenue growth by fiscal year 2025. This target has been upgraded to revenue growth in the high-single-digit to low-single-digit range. two digits.
Additionally, Nike projects that average annual earnings growth will be in the high teenage percentages by fiscal year 2025. Over the previous decade, Nike’s average earnings before interest and taxes were 13.2% . More importantly, Nike’s new outlook through 2025 calls for it to grow earnings per share in the mid to high teen percentages, up from previous teen growth forecasts.
But Nike has to get through this coronavirus pandemic first. In the first quarter of results since providing these long-term targets, Nike experienced supply chain disruptions that likely hurt sales. The company’s manufacturing facilities in Vietnam and Indonesia were forced to close for several weeks, and only the Indonesian factory was reopened to operations. The pause in production was enough for Nike to lower its revenue forecast for the rest of fiscal year 2022. Nonetheless, management reiterated that they believe they can achieve the long-term goal they have set. .
Nike improves its ability to generate cash
The only positive effect of the pandemic for Nike is that it has accelerated consumers’ shift to shopping online. According to Statista, e-commerce spending by all consumers as a share of overall spending jumped to 18% in 2020, from 13.6% in 2019. The increase was by far the largest of the previous four years. Despite the growth, it’s important to note that 82% of spending is still done in person. The trend is shifting in favor of e-commerce, which will help Nike push its digital and direct-to-consumer agenda.
Nike’s digital transformation has significantly boosted the company’s cash generation over the past decade (see chart). Moreover, the company is aiming for better profits over the next few years, which would translate into even higher cash flow.
How should investors react to this news from Nike?
If you’re considering this stock, be aware that it’s still not cheap by historical standards, trading at a price-earnings ratio of 42. Also, given that the company is facing bottlenecks of supply chain that will hurt sales for the rest of the year, its pricing performance is less likely to improve in the near term. Interested investors should not rush to buy Nike shares.
That being said, it’s a great company that aligns with changing consumer buying behavior in a way that could increase profit margins in the long run. Investors can put Nike on their list and opportunistically accumulate stock throughout the year as positive supply chain news comes out or if the stock price drops further.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting 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.