Nike(NYSE:NKE) reported results for the second quarter of fiscal year 2025 on December 19, which exceeded top and bottom line estimates (although expectations were very low). However, the stock fell slightly on December 20, despite a 1.1% gain in the share price S&P500 as investors digested Nike’s guidance and recovery timeline.
The company has raised its dividend for 23 years in a row and currently yields 2.1%, making it an intriguing option for passive income investors who believe in the turnaround story. Here’s what you need to know about Nike and whether its dividend stock is worth buying now.
Image source: Getty Images.
Nike stock is up just under 20% over the past nine years, despite a massive 196% rise in the S&P 500. The stock briefly hit an all-time high in 2021, but that was an overreaction to the COVID-induced surges in the expenses.
The company has encountered several challenges, the biggest of which is its distribution model. In 2017, it decided to expand its direct-to-consumer (DTC) business under the Nike Direct label to reduce its dependence on wholesalers, who act as intermediaries between consumers and Nike.
The strategy had the potential to increase Nike’s margins, build direct relationships with consumers and improve the effectiveness of its promotions. A company can better tailor its marketing efforts by better understanding buyer behavior and preferences. Think of the “You might also like” notification on a streaming service or online shopping website.
In addition to expanding DTC through Nike Direct, the company also wanted to grow its apparel business to become less dependent on footwear. Finally, Nike has taken a big step internationally, namely to China.
In retrospect, none of these ideas were particularly bad; they just left the company over-expanded and vulnerable to slowdowns. Nike Direct has done quite well, but has damaged the company’s wholesale business. China has gone through a recession for many companies, not just Nike.
The company is facing increasingly fierce competition Lululemon Athletica and others on the clothing side, and Deckers Outside-owned by Hoka and When holding mainly on the shoe side (although these brands also offer clothing). These DTC-native companies are no longer dependent on wholesalers, making them arguably more flexible than Nike.
Last quarter, sales fell in all regions, in footwear and apparel, and in both Nike Direct and wholesale. So the whole company is doing badly. The guidance offered no respite. Management forecasts a weak second half of the fiscal year as it cuts product prices to reduce inventories and strengthen the product pipeline.
New CEO Elliott Hill has said he hopes to get Nike “back to winning ways” by focusing more on its roots in footwear. In the meantime, margins are likely to take a huge hit as a result of the inventory reduction.
The key takeaway from last quarter and earnings commentary was that the company’s turnaround will take longer than expected, and near-term results will be weak. There is also the possibility that the turnaround will be further delayed if rates remain higher for longer.
The Federal Reserve’s comments on December 18 indicated that it could slow the pace of interest rate cuts, which could limit consumer spending on durable goods. If the new administration continues with tariffs, Nike’s margins could come under further pressure.
NKE data by YCharts; TTM = after 12 months.
As you can see from the chart, Nike’s sales are down from record highs, and operating margins are at their lowest levels in the past decade (if you exclude the brief pandemic-induced dip). In short, Nike is already in a vulnerable spot and not well positioned to meet these potential challenges.
The shares are probably worth buying, but only if you’re willing to hold them for at least five years. The near-term risks and potential rewards don’t look good, as much still needs to happen before Nike can show improvements, while external factors such as higher interest rates and fees could make the problems worse.
However, there’s no denying that the further the stock falls, the more attractive it becomes to long-term investors. Nike doesn’t look so cheap now as profits are expected to decline in the near term. However, it could start to look very cheap after it passes the inventory cuts. In a few years, it wouldn’t be surprising to see a successful Nike post-turnaround, especially if China recovers.
The dividend is an incentive to hold the shares during this period. A return of 2.1% is higher than the S&P 500 average of 1.2%. It’s also worth noting that even though Nike’s business hasn’t performed all that well, the company has still managed to increase its dividend by a significant amount in recent years.
The last five annual increases were 8%, 9%, 11%, 11% and 12%. I expect future increases to be in the high single digits. Yet Nike has evolved from a historically growth-oriented company to a viable passive income play.
In short, investors who have faith in the brand and don’t mind waiting for a turnaround might consider buying the stock now and sit back and collect passive income. But people who are skeptical may want to keep Nike on a watch list and see how the company responds to potential challenges.
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Daniel Foelber holds positions in Nike and has the following options: long January 2025 $70 calls on Nike. The Motley Fool holds positions in and recommends Deckers Outdoor, Lululemon Athletica, and Nike. The Motley Fool recommends On Holding. The Motley Fool has a disclosure policy.
Nike’s turnaround is underway, but is the dividend growth stock a buy before 2025? was originally published by The Motley Fool
