The business is in a “transitional” year, according to management.
Shares of athletic apparel company Nike (NKE 1.17%) plunged 30.6% in the first half of 2024, according to data provided by S&P Global Market Intelligence. When taking out just two days of trading, the stock would have been roughly flat for the six-month period. But it reported financial results twice. And the stock took a hit both times, dropping it below the 14.5% return for the S&P 500.
Nike’s fiscal calendar differs from traditional calendars — its fiscal 2024 ended in May. On March 21, the company reported financial results for its fiscal third quarter of 2024. And it reported for its fiscal fourth quarter on June 27. While the stock was already down year to date, the drop after its Q4 report was more pronounced.
NKE data by YCharts
Nike’s headline numbers for fiscal 2024 aren’t alarming in isolation. Full-year revenues were modestly up, gross margin improved, and net income was up 12% year over year to $5.7 billion. And yet something alarmed investors.
For perspective, at the beginning of the year there were 20 analysts recommending that investors buy Nike stock, according to TipRanks. Now there are only 13.Â
Headwinds started blowing harder against Nike’s business in Q4. And now management expects a challenging fiscal 2025. For the year, it expects revenue to be down and certain expenses to be up, which could lead to a drop in net profit as well.
Direct demand is drying up
It’s an interesting situation for Nike. In recent years, shoe stocks have done well as consumers buy more directly from the companies online instead of shopping at other retailers. But in Q4, Nike saw declines in direct revenue, whereas its wholesale revenue was up.
The benefit from wholesale revenue, however, was only temporary — retailers simply restocked shelves. In the upcoming fiscal first quarter of 2025, Nike won’t have that wholesale revenue benefit, so management expects revenue to drop 10% year over year.
In other words, Nike’s near-term outlook isn’t great. And management seems to think sales can bounce back once it starts launching newer products later in the year. Based on the stock price, I’d say investors aren’t ready to buy into that optimism yet.
What should investors do now?
From a price-to-earnings (P/E) perspective, Nike stock hasn’t been this cheap since 2012. This once-in-a-decade valuation needs to be acknowledged.
NKE PE Ratio data by YCharts
Some analysts wonder if Nike is an older brand that’s starting to lose its luster compared to younger, trendier brands. That is a common risk for apparel stocks — fashion can be fickle. If the Nike brand is declining, it likely doesn’t matter that the stock is cheap.
However, for investors with a more optimistic outlook for Nike’s business, it could be worth a position here. Just be aware that patience is necessary — management has already called fiscal 2025 a “transitional” year, so better days are likely still more than a year away.
Jon Quast 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.