This isn’t a question that many on Wall Street would have been asking themselves last year, as Nike (NYSE:NKE) spent most of Q4 soaring to all time highs. But as we head into what’s shaping up to be a stormy summer, you can be sure it’s being asked now. Shares of the sportswear titan are down more than 40% from their Q4 highs, and at their lowest since August 2020. Indeed, this is the same price they were changing hands for before any of us had ever heard of COVID.
So what’s the outlook exactly, and is there an argument for shares to turn around in the medium term?
Their fiscal Q4 numbers, released earlier this week, go some way to answering this. Though both revenue and earnings per share came in higher than expected, the former was marginally down year on year. The subsequent 7% drop in shares during yesterday’s session sums up Wall Street’s reaction to the latest report.
Having said that though, Nike still went out of their way to strike a bullish tone and focus on the positives. John Donahoe, President and CEO, said with the results that:
“Nike’s results this fiscal year are a testament to the unmatched strength of our brands and our deep connection with consumers. Our competitive advantages, including our pipeline of innovative products and expanding digital leadership, prove that our strategy is working as we create value through our relentless drive to serve the future of sport."
Near Term Headwinds
It might be hard for some of us to see exactly where this unmatched strength and competitive advantages are helping the stock’s performance, but as Seaport Research Partners pointed out last week, Nike is “only down 39% from their 52 week highs, versus the 46% that their average peer is down.” This comment came as part of the firm's downgrade to Nike shares. They moved them down to a Neutral and took a cautious stance on the medium term outlook.
Analyst Mitch Kummetz wrote that:
“there's a disconnect between sentiment and reality and the sentiment isn’t exactly great.”
However, the company is technically still outperforming their peers. He went on to explain that Nike’s resilience as the rest of the retail sector reels is a trend that defies logic. For those of us starting to think that this might justify a toe being dipped in the water, Kummetz urges caution. Nike’s price-to-earnings ratio is still around 23x, even after the months of selling, and this is about double that of its peer group. As growing inflation and supply chain risks, as well as the slowdown in spending across China, will impact Nike just as much if not more than the peer group, that premium is hard to justify in his mind.
Considering A Position
Lorraine Hutchinson from Bank of America took a similar view when she reiterated her Neutral rating last week. She wrote in a note to clients:
“A choppy environment in China and a faltering US/EMEA macro picture balance the long term positives of elevated innovation and the margin benefits of a shift to DTC.”
And this perhaps sums up the situation for any retail investors thinking about a fresh position. Nike is going nowhere in the long run, but is dealing with more than its fair shares of fundamental headwinds in the near term that are forcing shares to go through a pretty brutal revaluation.
There’s no doubt that they’re in a well defined downtrend and setting lower lows, but they should soon be running into some pretty stubborn support around the $98 mark. If they can spend some time consolidating around there and if there are signs that these headwinds might clear by the end of 2022, there mightn’t be many better buys than Nike in the second half of 2022. It’s definitely a higher risk stock at the moment, but it’s hard to see any position not turning into a winner in the long run.