If the shoe fits, wear it. Some people claim to be “buy low, sell high” investors, but when a stock tumbles, they run for the hills. It takes an iron stomach and a true contrarian spirit to stand out from the crowd and buy beaten-down Nike (NYSE:NKE) stock now.
This certainly isn’t to suggest that all fallen stocks are worth owning. Instead, it’s an invitation to consider whether the market might be overreacting to Nike’s recently revealed quarterly results and forward guidance.
Sure, it’s easy to just glance at the slew of post-earnings downgrades and assume that Nike must be uninvestable now. Yet, outsized returns can come to those who consider the analysts’ arguments but then come to their own informed conclusions.
Was the Nike stock decline a surprise?
“Clearly, the consumer is witnessing mounting headwinds,” Vital Knowledge newsletter founder Adam Crisafulli recently told Bloomberg. “Now we have a selective consumer, and as an investor you have to watch those trends,” he added.
It’s not difficult to identify the “mounting headwinds” as high interest rates and elevated inflation. It’s challenging for many U.S. consumers to pay off their high-interest credit card debts. While the rate of price increases on commonly bought goods has subsided, many items are still considerably more expensive than they were a few years ago.
These aren’t unknown factors, by any means. The market should have been fully prepared for Nike to report slow or no sales growth in the fourth quarter of fiscal 2024. Moreover, investors should have been ready for Nike to provide downbeat but realistic guidance.
Nevertheless, jaws dropped and monocles popped as Nike disclosed the data last Thursday. In a breathtaking rout, Nike stock plunged nearly 20% on Friday, marking its deepest drop in decades.
Analysts couldn’t contain their consternation. Nike’s “fundamental trends,” according to UBS analyst Jay Sole, “are much worse than we realized.” Meanwhile, Barclays analyst Adrienne Yih warned that the footwear maker’s report “raised more questions and more uncertainty about the long-term health of the Nike brand.”
Similarly, Morgan Stanley analyst Alex Straton characterized Nike’s “long-term growth and profitability” as “unclear.” Stifel analyst Jim Duffy practically prognosticated an executive-suite shakeup, declaring, “Management credibility is severely challenged, and potential for C-level regime change adds further uncertainty.” And perhaps worst of all, TD Cowen analyst John Kernan asked whether “the good days are over” for Nike.
True-blue contrarians should salivate at such consensus-level negative sentiment. This isn’t necessarily the sign of a stock-price bottom, but it’s at least what a bottoming process might look like.
Were Nike’s results really all that bad?
Circling back to Sole’s realization that Nike’s fundamentals “are much worse than we realized,” one might wonder whether some market experts expected too much of the company. Again, high interest rates and persistent inflation haven’t provided a favorable backdrop for premium-brand sportswear retailers.
Instead of relying solely on appalled analysts’ reactions, we should look at the actual data. In the fourth quarter ending on May 31, 2024, Nike’s revenue declined 2% year over year to $12.6 billion. That’s only a slight miss, however, when compared to the analysts’ consensus estimate of $12.9 billion in quarterly revenue.
Besides, Nike’s top-line results were not entirely negative. Indeed, the company’s fourth-quarter wholesale revenue grew 5% year over year to $7.1 billion.
Continuing with the glass-half-full perspective, Nike’s gross margin increased 110 basis points to 44.7%. Furthermore, Nike reported adjusted earnings of $1.01 per share, beating the analysts’ consensus call for 84 cents per share.
Regarding forward guidance, Nike expects its revenue to decline percentage-wise in the “mid-single digits” during the current fiscal year. In contrast, analysts anticipated 2% full-year revenue growth.
That’s downbeat sales guidance, to be sure, but did it justify a 20% single-day drop in Nike stock? That’s the billion-dollar question for value-seeking investors.
For what it’s worth, Nike isn’t just sitting by idly. In the company’s earnings call, Chief Financial Officer (CFO) Matthew Friend revealed that Nike is “attacking opportunities across price points, including a refreshed lineup of new footwear products below $100.” So, it appears that Nike is willing to try out a flexible pricing strategy in response to inflationary pressures on the consumer.
Friend acknowledged, “It’s going to be challenging over the next couple of quarters,” but the market clearly knows this and has already baked its distaste into the Nike share price. Now, while Nike is in the penalty box, audacious investors can lace up and – if they’re ready for a long-distance run – give downtrodden Nike stock a try.
