1 Growth Stock Down 42% to Buy Right Now


Most people like bargains, even when the bargain in question is a stock. But it’s only a bargain if it’s actually worth owing at any price.

That’s the rub for investors eyeing shares of Nike (NKE 0.70%), which are now trading more than 40% below their 2021 high. That’s a big discount, but the company seems to be struggling more than it should be. And the stock could be priced even lower in the foreseeable future.

In the bigger picture, though — from a risk-reward perspective — now is the time to take a shot on Nike.

Plenty of problems

Nike admittedly pushes the boundaries of what’s considered a growth stock. Even when it’s firing on all cylinders, sales growth is still only in the single digits. Even after lowering the bar for what qualifies as a growth stock, however, this company has problems.

For instance, last quarter’s sales were essentially flat year over year, and while earnings were up, the bottom line is still hovering below profits seen two years ago when revenge spending coming out of the worst of the pandemic was strong.

NKE revenue (quarterly) data by YCharts.

Pricing power could be part of the problem, in the shadow of budding rival brands like On Holding and Hoka, owned by Deckers. (Some younger consumers are looking for brands besides the ones their parents know and love.)

Data compiled by analytics outfit Vertical Knowledge indicate retailers’ markdowns of Nike-made sneakers were significantly higher than the norm late last year, pointing to weakening marketability for the brand.

The company details how Macy’s average sales price for Nike sneakers in late 2023 was less than $80 a pair, down from over $100 in 2021. All told, Vertical Knowledge says, athletic footwear and apparel retailers discounted 44% of their Nike footwear in the latter half of 2023, versus only 19% at the same time period in 2021.

It’s a microcosm of Nike’s struggle since then: challenges exacerbated by lingering, pronounced weakness in China. Last year’s inventory bloat further underscores the company’s headaches.

But the one thing all investors should keep in mind is that you own stocks for where the company is going rather than where it’s been. And where Nike seems to be going right now is in the right direction.

The bullish case for Nike

Nike’s numbers for its fiscal second quarter, ending in November, weren’t exactly thrilling. As was noted, sales were basically even year over year.

The company also dialed back its outlook for the remainder of the fiscal year, with chief financial officer Matthew Friend saying, “This new outlook reflects increased macro headwinds, particularly in Greater China and [Europe, the Middle East, and Africa.]”

Nike isn’t simply rolling over, however. It’s responding.

One of these responses is an effort to reduce spending by $2 billion over the course of the coming three years. These savings are expected to be the result of a smaller lineup of footwear, fewer employees, supply chain improvements, and more automation.

Other upsides were already falling into place, and still are. For example, while inventory levels soared to unwieldy levels a couple of years back, that problem is now under control. Last quarter’s inventory of $8 billion is down 14% from the year earlier.

NKE Inventories (Quarterly) Chart

NKE inventories (quarterly) data by YCharts.

China is less of a weak spot as well. Last quarter’s sales in that country were up 4% year over year, or 8% after adjusting for currency fluctuation. That’s the second consecutive quarter Nike has seen such growth from this market, in step with overall retail spending growth.

China’s retail sales grew 7.4% in December, the 12th straight month the country’s consumer spending has improved year over year.

Perhaps the most meaningful tailwind Nike is about to catch is the one starting to blow everywhere, including the all-important North American market — consumers are increasingly starting to have hope about their economic futures.

There are certainly still vulnerabilities. Sky-high credit card debt is one of them. The Federal Reserve reports domestic credit card debt stood at a record $1.13 trillion at the end of 2023, with many consumers tapping their credit lines just to pay for basic necessities.

And although last month’s jobs growth of 353,000 was a pleasant surprise, layoffs — particularly within the technology sector — are alarmingly high. These could be an omen of job weakness on other fronts.

Nevertheless, consumer confidence is on the mend. The Conference Board, which provides insights on the economy, says its Consumer Confidence index jumped last month from December’s reading of 108 to a two-year high of 114.8. Easing inflation had much to do with that improvement, and while not part of the index’s math, the odds of a recession-evading “soft landing” appear to be improving as well.

It sets the stage for increased consumer spending on discretionary goods — like high-end sneakers.

Worth the wait, and the wild ride that likely awaits

Nike’s overhaul could still take several more quarters for the company to return to its former glory. It’s still trying to figure out how it can optimize its relationships with retail partners, for example, which are facing problems of their own.

Foot Locker announced early last year that it would be shutting roughly 400 North American stores by 2026. Some locales will be rebranded, but others will simply be abandoned.

Macy’s also continues to close stores. Its recent discounting of Nike footwear could have less to do with the marketability of the brand and more to do with the department store chain’s struggle just to generate foot traffic. All the same, it’s a challenge for Nike, too.

It is rising to the challenge, though. While overall sales growth was anemic last quarter, the company’s sales from its own stores improved 6%, while e-commerce sales grew 6%.

And over 40% of Nike’s total revenue is now driven directly by the company itself, and that figure continues to edge higher. That’s high-margin revenue, too. In the meantime, look for $2 billion worth of cost cuts to further bolster the bottom line.

Rekindled economic growth will further fan any nascent bullish flames sparked by the company’s regrouping efforts.

Maybe this will convince you: Of the 38 analysts currently keeping tabs on Nike, over half of them rate the stock as a buy, with most of those bulls suggesting it’s a strong buy. Their consensus price target of $122.70 is also 20% above the stock’s current price. Most of these analysts seem to be seeing the same bigger picture painted above.

They might also be keenly aware that in spite of the company’s current challenges, the Nike brand is a powerful one that’s woven into the fabric of the global culture. It’s not going to be held back forever.



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