Nike Being Monitored – Daily Star

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Nike’s investor relations page confidently states, “Nike Inc. is a growth company”—a statement that is enticing yet difficult to validate. Unfortunately, the stock price tells a contrasting story, showing a five-year compound annual growth rate (CAGR) of -5.3%, which signifies a downturn.

Read: Nike to discontinue virtual sneaker label RTFKT under new CEO

This year alone, Nike’s shares have plummeted by 26.5%. If you decided to invest, you might find yourself regretting that choice.

Numerous factors have led to this decline, primarily stemming from inflated expectations. While it’s true that Nike is a globally recognized brand—boasting flagship stores in local communities and numerous copies found in markets like Istanbul a few months ago—their impressive roster of athlete endorsements and unmatched sports legacy don’t assure market success.

Despite its popularity, a middle-income consumer may hesitate to buy Nike’s premium items when compared to its rivals. From my own experience, after purchasing a pair of Nikes last year to evaluate their worth, I found no significant difference in quality compared to other renowned brands.

What you’re truly paying for is the brand. This approach works well in luxury markets, but can be precarious in more accessible ones.

If the brand is Nike’s most valuable asset, how does its strength truly hold up? This is where Nike appears to have lost connection with reality.

Is the brand resilient enough to exclude wholesalers like Foot Locker, assuming consumers are so captivated by the shoes that they’ll ignore retail variety in favor of direct purchases from Nike?

Initially, Nike believed this approach would pay off by capitalizing on the pandemic and the growth of e-commerce to reduce inventory and selection at stores like Foot Locker. It seemed effective for a time, as loyal customers turned to Nike’s app for their sneaker needs.

Yet, as Foot Locker sought to stock its shelves with brands ready to collaborate rather than compete, the dynamics began to change.

Nike has recently lost ground in crucial product areas such as running shoes, where customers generally prefer to try before they buy.

This strategy proved harmful for both Nike and Foot Locker. Over the past five years, Nike’s stock has fallen by 23%, while Foot Locker’s has experienced a staggering decline of 44%. The sole beneficiary of this situation has been the consumer, who enjoys lower prices due to increased competition among former partners, albeit at the cost of a more complicated shopping experience.

This dilemma, exacerbated by supply chain disruptions and escalating interest rates, has created the perfect storm for Nike’s underperformance—fueled by its pricing and distribution strategies. There’s a crucial lesson in understanding whether consumer brand strength derives more from distribution channels or brand allure; it seems that distribution is of greater significance.

What is Nike’s current standing?

Nike appears to be rethinking its strategy, as indicated by the rise in promotional sales within the company. If the brand is genuinely strong, why is there such a substantial percentage of discounted items in its sales? The effectiveness of a brand and pricing strategy is typically shown in the volume of full-price sales.

This is where substantial profit margins are generated. Promotions should ideally act as a means to clear out excess inventory. A heavy reliance on discounts signals weak demand at standard prices and hints at a flawed strategy.

Over time, this can significantly damage brand credibility and foster an environment where consumers anticipate discounts instead of buying at full price, complicating recovery efforts.

Read: The Apple CEO’s other role: Assisting Nike in its turnaround

In contrast, consider Lululemon’s approach, where I established a long position this year due to recent stock declines. Lululemon strategically utilizes Black Friday to clear old inventory while maintaining optimal price points with fresh products, avoiding the need for markdowns.

This strategy allows them to free up working capital while still enticing customers to purchase full-price items—underscoring the strength of their brand. This is precisely why I prefer investing in Lululemon over Nike; I identified an opportunity in the former while passing on the latter.

Can new management revive Nike?

Elliott Hill, Nike’s newly installed CEO, isn’t a stranger to the company, having dedicated 32 years to Nike before retiring in 2020. After returning just two months ago, he faces the challenge of rectifying the strategic missteps of previous leadership.

During the latest earnings call, Hill expressed his priorities.

A key point he made was that Nike has deviated from its passion for sports.

With his vast experience at Nike, he possesses an understanding of the company’s core identity. Going forward, the focus will return to sports, suggesting a shift away from lifestyle-focused products. The brand’s narrative will likely transition back towards sports—an astute move that capitalizes on Nike’s strength in athlete endorsements—this is the company’s competitive edge!

Read:
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A key aspect of their strategic shift is the acknowledgment that an excessive focus on Nike Digital has been detrimental to the brand. In the future, they aim to prioritize wholesale channels significantly, aligning with consumer shopping habits rather than forcing them to shop exclusively online.

This is a promising development for retailers like Foot Locker and Dick’s Sporting Goods, suggesting that a smart move for Nike’s recovery could involve investing in one or both of these retailers.

Above all, regaining traction in full-price sales is essential. Currently, Nike’s digital platforms reflect an alarming ratio of 50% full-price to promotional sales for a brand that claims to be premium.

With a constant currency revenue dip of 9% this quarter and gross margins contracting by 100 basis points to 43.6% due to promotions, substantial work lies ahead. In contrast, Lululemon boasts a gross margin of 57%, indicative of what a premium brand should achieve.

Is this a positive step forward?

The lack of performance during a year highlighted by the Olympic Games—the pinnacle of athleticism—illustrates how far off course Nike has strayed. Hill appears to be beginning strong with his vision.

However, this journey resembles a marathon rather than a sprint.

Nike’s current valuation is pegged at a Price/Earnings multiple of 22x, similar to various JSE companies. For more insights, listen to last week’s discussion on P/E multiples and the over-20x club among high-quality JSE firms.

If Hill can reignite passion within Nike, it may become a stock worth watching in 2025.

For now, both Nike and Foot Locker remain on my watchlist. I’m contemplating investments in both, but I will wait for indications that their share prices are stabilizing and starting to rise before taking action, especially considering the current hawkish tendencies from the Fed.

Prices can always decline further, and with certain stocks, it’s often prudent to wait for signs of turning momentum—a sage lesson from experienced traders!

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