Shares of Nike (NYSE: NKE) fell after the sportswear and footwear company disappointed investors by predicting a surprise decline in fiscal 2025 revenue. The stock is now down about 30% this year so far.
These recent losses have extended Nike’s decline since its stock price peaked in 2021. Shares have fallen about 10% over the past five years.
Let’s take a look at Nike’s most recent quarterly results and the issues facing the company to determine if now is an opportunity to buy.
Surprising guidance
For the fourth quarter of fiscal 2024 (ending May 31), Nike’s revenue fell 2% year over year to $12.6 billion. Nike brand revenue fell 1% to $12.1 billion, while Converse revenue fell 18% to $480 million.
Through the channel, Nike’s direct sales fell 8% to $5.1 billion, while wholesale sales rose 5% to $7.1 billion. However, the company still managed to expand its gross margin 110 basis points to 44.7%, helped by lower ocean freight costs and pricing changes. Management also cut operating costs, with selling, general and administrative (SG&A) expenses falling 7%.
As a result, earnings per share (EPS) rose 50% to $0.99, despite the overall revenue decline. Meanwhile, inventories fell 11% year-on-year to $7.5 billion.
While the quarterly results were mixed, it was the expectations that shocked investors.
The company now expects revenue to decline by a mid-single digit percentage in fiscal 2025, reversing a comment CFO Matt Friend made during the March earnings report that revenue “will accelerate in the second half of the year and will show revenue growth next year.”
For the first fiscal quarter, management is forecasting a 10% year-over-year revenue decline, with the first half of the year showing a decline in the high single digits.
The company blamed challenges in its direct business, a weak wholesale order book, a softer China and aggressive measures it is taking to manage its legacy footwear franchises. It sounds like nearly every segment within Nike is experiencing problems, and those problems are spread across multiple regions.
On the positive side, the company is hoping for gross margin growth of 10 to 30 basis points for the year, and its inventory position appears fairly manageable. This should not be overlooked, as when apparel and footwear companies run into sales problems, it can often be compounded by inventory and gross margin issues.
Is this an opportunity to buy the shares?
Nike is an iconic brand, although it has clearly fallen on hard times in recent years. The company hopes to reignite growth through product innovation, and it has always been a marketing machine.
From a valuation perspective, the company is now trading at a forward price-to-earnings (P/E) ratio of 24. Nike has generally traded at a premium to the broader market, given the strength of its brand. However, for a company with a shrinking top line, the valuation seems frothy at this point.
Overall, Nike should be able to turn the tide, but given the company’s trouble predicting operating results, shareholders should expect increased volatility in the stock, especially around earnings reports.
If the valuation drops further, I will buy shares. Until then, investors should keep Nike on their watchlist.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
Nike shares tumble on disappointing outlook. Is this a slam dunk opportunity to buy the stock? was originally published by The Motley Fool
