Great analysis. The key really falls to whether Nike still has the brand name it used to have after recovering from the fiasco from the last few years. On paper, Nike will look cheap but that is all regarding the turnaround operationally and I have no doubt they can execute that. The issue is they wouldn’t be the first apparels brand to fall from grace and never recover. Having to do sales to clear inventory can do that to a brand. Thats the part that keeps me from investing.
Excellent write-up which made me think. Thank you!
Nevertheless, I remain of the view that Nike has lost its magic and is not showing it can get it back. Its current valuation reflects a few remaining hopeful optimists who think that magic could return and, if it does, Nike is the place it would return to.
Nike invented the segment of sports shoes that signaled identity, beyond just having something practical to put on your feet. That segment is in decline. Customers are primarily youth, the world is making fewer and fewer of them and those who remain are increasingly less likely to find their identity in their shoes.
Even if that is wrong, Nike at its best showed long term revenue growth only low single digits above inflation. The challenge to better that is even harder now than when Nike was the cool thing that every kid had to have.
If that is correct, thinking of the net present value of future cash flows, Nike should be valued like General Motors in which a PE of 10 is high.
First of all, thank you for writing such a thoughtful comment, Duane!
However, while I can see where you come from, I don't agree with your assessment (probably no surprise). I still view Nike's identity and appeal as rather strong. I know it is no luxury brand such as LV or Dior, but its brand is highly regarded and with the right approach, I do believe that magic should be able to return.
Yes, times change, and time will have to tell just how strong it will bounce back with today's consumer interests and priorities, but I do still see a lot of potential here for Nike, especially if it is once more able to lean on its sports identity.
Management has taken very wrong turns in recent years, but I wouldn't say this is a broken business.
And apart from all of that, from current very low margin levels for numerous reasons, there is a lot to like from an EPS growth perspective, even if revenue won't go much higher than mid-single digits, indeed.
Combined with the sheer brand value, resiliency, and all other factors mentioned in my article, I do still view Nike as a premium stock, deserving a premium multiple. I can in no way really compare it to General Motors. In all honestly, while vastly different, I view it as closer to an LVMH, which also trades at a premium for a business growing mid to high single digits due to high brand value and appeal, among other things.
Ultimately, time will tell how impressive this Nike turnaround will be, but as said before, I am optimistic. But, I will admit, it is definitely a somewhat riskier investment than what I prefer, which is why I am definitely still not loading up on shares.
I appreciate your willingness to make clear arguments for your take. Your arguments help shape my own views.
LVMH is a good company against which to compare Nike. I like that idea! Nike's current valuation is very close to LVMH. Indeed, Nike could fit as an LVMH managed brand. LVMH is heavily diversified luxury, so if trends change in any particular area, LVMH has many other brands in many other areas to support their business. Nike is just sport footwear. Luxury and status are constants, it is what makes for luxury and status that changes. However, unlike LVMH, I have a hard time imagining plausible scenarios for Nike to, say, double. A stately slide down in evaluation multiples seems more plausible. Long on Nike feels like dead money to me - and I would point out that General Motors has Cadillac....
I think the issue is bigger than Nike management making mistakes. They arguably made some tactical errors, just like most management teams that took measured risks. The larger challenge is that Nike was there at a moment in time when sports shoes could become a status item. That time is fading, regardless of how perfectly Nike management plays their hand.
While valuation multiples should trend down a bit indeed, I do still expect Nike to keep trading at a premium for a longer time. While it is no luxury brand, the brand status and value are remarkably high.
Also, if Nike continues to be able to capture underlying market growth of, say, mid-single digits and a subsequent margin recovery, I do believe a doubling in share price is possible, even if multiples might normalize to the mid-twenties.
That is why, at current levels, I wouldn't say Nike is dead money, unlike how I view GM and its peers.
Finally, while I agree that sports shoes are no longer the status item they used to be, I also think we shouldn't underestimate the appeal of the Nike brand. I don't think this has declined as much as we might think, but that is up to management to prove.
Once again, I iterate that your Nike analysis is first rate. If there is an optimistic case to be made, you have made it and defended it with skill and conviction.
I hope you are right to be optimistic but fear you are wrong.
The Ackerman ~$1.2B investment pushed Nike from ~$75 to ~$90. It has since settled back around $75. Ackerman is underwater on Nike and will give them about a year before his position itself becomes a risk to the price.
In hindsight, the pandemic was a catastrophe for Nike. The reason people overspend on Nike shoes is to be seen with them. For more than two years, you couldn't show off your shoes. Then, why buy? This created a status gap that other things filled - including other, cooler, niche shoe brands that better managed the change. Becoming as cool as one used to be is a lot harder than staying cool. The greater risk is looking uncool by trying to regain cool. Plus, the market is young people with disposable income, a market which is in secular decline and has many more ways to be cool than it did before the pandemic.
The Nike turnaround story reminds me strongly of the General Motors turn around story. The same basic vibe, repeated while in the background the steady drumbeat of market share declines while other businesses in the same segments grow. Part of the General Motors turn around story was (and remains) excuses about external factors. It is disappointing that Nike blames the 'weak consumer' for much of their declines. That is simply not correct. Consumers aren't weak, not at least if you look at, for instance, Walmart and Costco. Sales decline in China due to a difficult consumer environment!?! That makes no sense. Consumer spending continues to rise in China, even if not at the same levels as prior years.
The problem is not 'weak consumer', it is Nike. That the new management team makes this excuse rather than squarely facing the facts is a bad sign about their ability to properly execute a turn around. If they are to have a hope of turning things around, they have to acknowledge things as they are, without excuses.
Management projects continued declines in sales, earnings and margins until a recovery in late 2025. It is good that they are projecting a few bad quarters, but at each one they will take a further hit to their multiples. Revealing a 50% drop in earnings next quarter, even if projected, is going to hammer their PE and won't help the safety of the dividend, currently at 43% of EPS. If LVMH is the comparator (thank you for that insight!), even at LVMH multiples, the Nike price will have to take a hit.
Increasing the dividend was another bad sign of management taking a turn around seriously. They should be at war to turn around the company. Instead, they are hoping to glide through the secular decline in a way that doesn't ruffle too many feathers. The approach, frankly, is not consistent with the 'just do it' Nike brand and how a person who wants to wear Nike does so because it implies being someone who throws everything they've got at achieving excellence.
If Nike can't even live by their own brand, how can they expect consumers to?
I regret to remain a pessimist. Thank you again for your excellent analysis and skilled articulation of the optimistic case.
Thank you, Duane! Your comments have got me thinking and presenting an excellent bear case, which I will take into consideration in my next Nike write-up. This has been extremely insightful!
One final addition I will make to your story above (because I think you make a strong case as well!!) is that this 'consumer weakness' seems to be somewhat of an apparel/sportswear industry demand weakness issue as opposed to a general consumer weakness. Take the results from something like LULU or adidas, which also still show and claim consumer demand weakness, although far less than Nike, especially in China.
So, while definitely an excuse up to a point, I do think this weakness actually exists, further increased by management's own mistakes.
Again, thank you for these terrific insights, Duane! It has got me thinking.
Like I already said, I remain cautiously optimistic, but I am absolutely not compelled to add further at this price point. If shares would drop another, say 10-15%, I would be much more interested. We need this price to drop below $70 to make it really interesting, in my view.
I know you are just quoting Nike about the 'weak consumer', but since it is the same consumers Lululemon has to sell to, I just refreshed my memory.
Lululemon China 3Q sales up 24% in constant dollars (Nike is down in China, which is hard to do in a market that continues to grow). Lululemon 'Rest of World' 3Q sales (including China, excluding Americas) up 20% in constant dollars.
Yup, that's quite the 'weak consumer', yet Lululemon trades at about the same PE as Nike while having a much more compelling growth story.
That Nike and their new CEO believes the 'weak consumer' is a big part of their problem is a real cause for concern that they don't understand their problem well enough to turn it around.
The 'consumer weakness' in apparel/sportswear is not a temporary thing. It is a function of demographics and the declining birthrate. That Nike doesn't say this is a red flag. If they don't even understand it, that's even worse.
In the US, there are more people in their 30s than in their 20s. When the people in their 20s become people in their 30s they in turn will outnumber the people who have in their turn grown into their 20s. I suspect it is probably even worse than the US in most Nike markets.
It is roughly the people in their 20s who are spending on apparel/sportswear for status reasons. By the time they are in their 30s, they are paying the mortgage, the SUV, cost of children. Time to be sporty has disappeared, as has interest in demonstrating status to peers by overspending on sports shoes. If the sporty stuff they bought in their 20s still fits, they can wear it. If it no longer fits, they're no longer being sporty and will not replace it with more sporty stuff (Lululemon being a good exception that reinforces the point, which is one reason I like Lululemon).
When it grew, Nike had a lovely tailwind of growing populations of optimistic young people eagerly active in the world. Now they have a headwind of shrinking populations of young people who are less optimistic and increasingly more interested in the world in their devices over the physical world. This may technically be 'consumer weakness', but it is deeply misleading as it isn't what most of us would think of when we read 'consumer weakness'. Consumers continue to spend, in fact they spend more. They are just less interested in Nike.
Nike's challenge to get its mojo back is significantly harder than, and different from, the challenge it had to nurture and grow its mojo. General Motors, for instance, faced a similar set of challenges. Intel...
Nike needs ~3% revenue growth just to stay level with inflation. Then it needs another ~2% growth per customer in its demographic to counter declines in its market. If they are to hit a 7% growth target, they need 6% growth beyond inflation per customer. Nike at its best, without demographic headwinds, without misunderstanding or misdirection about the fundamental challenge it was facing, was not able to achieve this level of success.
Great analysis. The key really falls to whether Nike still has the brand name it used to have after recovering from the fiasco from the last few years. On paper, Nike will look cheap but that is all regarding the turnaround operationally and I have no doubt they can execute that. The issue is they wouldn’t be the first apparels brand to fall from grace and never recover. Having to do sales to clear inventory can do that to a brand. Thats the part that keeps me from investing.
Great thesis, find no fault. To account for dividends-cash returned tonshare holders-NKE is even cheaper when ysingbthe dividend adjusted PEG ratio.
Excellent write-up which made me think. Thank you!
Nevertheless, I remain of the view that Nike has lost its magic and is not showing it can get it back. Its current valuation reflects a few remaining hopeful optimists who think that magic could return and, if it does, Nike is the place it would return to.
Nike invented the segment of sports shoes that signaled identity, beyond just having something practical to put on your feet. That segment is in decline. Customers are primarily youth, the world is making fewer and fewer of them and those who remain are increasingly less likely to find their identity in their shoes.
Even if that is wrong, Nike at its best showed long term revenue growth only low single digits above inflation. The challenge to better that is even harder now than when Nike was the cool thing that every kid had to have.
If that is correct, thinking of the net present value of future cash flows, Nike should be valued like General Motors in which a PE of 10 is high.
That would be a target price of $22.
First of all, thank you for writing such a thoughtful comment, Duane!
However, while I can see where you come from, I don't agree with your assessment (probably no surprise). I still view Nike's identity and appeal as rather strong. I know it is no luxury brand such as LV or Dior, but its brand is highly regarded and with the right approach, I do believe that magic should be able to return.
Yes, times change, and time will have to tell just how strong it will bounce back with today's consumer interests and priorities, but I do still see a lot of potential here for Nike, especially if it is once more able to lean on its sports identity.
Management has taken very wrong turns in recent years, but I wouldn't say this is a broken business.
And apart from all of that, from current very low margin levels for numerous reasons, there is a lot to like from an EPS growth perspective, even if revenue won't go much higher than mid-single digits, indeed.
Combined with the sheer brand value, resiliency, and all other factors mentioned in my article, I do still view Nike as a premium stock, deserving a premium multiple. I can in no way really compare it to General Motors. In all honestly, while vastly different, I view it as closer to an LVMH, which also trades at a premium for a business growing mid to high single digits due to high brand value and appeal, among other things.
Ultimately, time will tell how impressive this Nike turnaround will be, but as said before, I am optimistic. But, I will admit, it is definitely a somewhat riskier investment than what I prefer, which is why I am definitely still not loading up on shares.
I appreciate your willingness to make clear arguments for your take. Your arguments help shape my own views.
LVMH is a good company against which to compare Nike. I like that idea! Nike's current valuation is very close to LVMH. Indeed, Nike could fit as an LVMH managed brand. LVMH is heavily diversified luxury, so if trends change in any particular area, LVMH has many other brands in many other areas to support their business. Nike is just sport footwear. Luxury and status are constants, it is what makes for luxury and status that changes. However, unlike LVMH, I have a hard time imagining plausible scenarios for Nike to, say, double. A stately slide down in evaluation multiples seems more plausible. Long on Nike feels like dead money to me - and I would point out that General Motors has Cadillac....
I think the issue is bigger than Nike management making mistakes. They arguably made some tactical errors, just like most management teams that took measured risks. The larger challenge is that Nike was there at a moment in time when sports shoes could become a status item. That time is fading, regardless of how perfectly Nike management plays their hand.
While valuation multiples should trend down a bit indeed, I do still expect Nike to keep trading at a premium for a longer time. While it is no luxury brand, the brand status and value are remarkably high.
Also, if Nike continues to be able to capture underlying market growth of, say, mid-single digits and a subsequent margin recovery, I do believe a doubling in share price is possible, even if multiples might normalize to the mid-twenties.
That is why, at current levels, I wouldn't say Nike is dead money, unlike how I view GM and its peers.
Finally, while I agree that sports shoes are no longer the status item they used to be, I also think we shouldn't underestimate the appeal of the Nike brand. I don't think this has declined as much as we might think, but that is up to management to prove.
Once again, I iterate that your Nike analysis is first rate. If there is an optimistic case to be made, you have made it and defended it with skill and conviction.
I hope you are right to be optimistic but fear you are wrong.
The Ackerman ~$1.2B investment pushed Nike from ~$75 to ~$90. It has since settled back around $75. Ackerman is underwater on Nike and will give them about a year before his position itself becomes a risk to the price.
In hindsight, the pandemic was a catastrophe for Nike. The reason people overspend on Nike shoes is to be seen with them. For more than two years, you couldn't show off your shoes. Then, why buy? This created a status gap that other things filled - including other, cooler, niche shoe brands that better managed the change. Becoming as cool as one used to be is a lot harder than staying cool. The greater risk is looking uncool by trying to regain cool. Plus, the market is young people with disposable income, a market which is in secular decline and has many more ways to be cool than it did before the pandemic.
The Nike turnaround story reminds me strongly of the General Motors turn around story. The same basic vibe, repeated while in the background the steady drumbeat of market share declines while other businesses in the same segments grow. Part of the General Motors turn around story was (and remains) excuses about external factors. It is disappointing that Nike blames the 'weak consumer' for much of their declines. That is simply not correct. Consumers aren't weak, not at least if you look at, for instance, Walmart and Costco. Sales decline in China due to a difficult consumer environment!?! That makes no sense. Consumer spending continues to rise in China, even if not at the same levels as prior years.
The problem is not 'weak consumer', it is Nike. That the new management team makes this excuse rather than squarely facing the facts is a bad sign about their ability to properly execute a turn around. If they are to have a hope of turning things around, they have to acknowledge things as they are, without excuses.
Management projects continued declines in sales, earnings and margins until a recovery in late 2025. It is good that they are projecting a few bad quarters, but at each one they will take a further hit to their multiples. Revealing a 50% drop in earnings next quarter, even if projected, is going to hammer their PE and won't help the safety of the dividend, currently at 43% of EPS. If LVMH is the comparator (thank you for that insight!), even at LVMH multiples, the Nike price will have to take a hit.
Increasing the dividend was another bad sign of management taking a turn around seriously. They should be at war to turn around the company. Instead, they are hoping to glide through the secular decline in a way that doesn't ruffle too many feathers. The approach, frankly, is not consistent with the 'just do it' Nike brand and how a person who wants to wear Nike does so because it implies being someone who throws everything they've got at achieving excellence.
If Nike can't even live by their own brand, how can they expect consumers to?
I regret to remain a pessimist. Thank you again for your excellent analysis and skilled articulation of the optimistic case.
Thank you, Duane! Your comments have got me thinking and presenting an excellent bear case, which I will take into consideration in my next Nike write-up. This has been extremely insightful!
One final addition I will make to your story above (because I think you make a strong case as well!!) is that this 'consumer weakness' seems to be somewhat of an apparel/sportswear industry demand weakness issue as opposed to a general consumer weakness. Take the results from something like LULU or adidas, which also still show and claim consumer demand weakness, although far less than Nike, especially in China.
So, while definitely an excuse up to a point, I do think this weakness actually exists, further increased by management's own mistakes.
Again, thank you for these terrific insights, Duane! It has got me thinking.
Like I already said, I remain cautiously optimistic, but I am absolutely not compelled to add further at this price point. If shares would drop another, say 10-15%, I would be much more interested. We need this price to drop below $70 to make it really interesting, in my view.
Cheers!
I know you are just quoting Nike about the 'weak consumer', but since it is the same consumers Lululemon has to sell to, I just refreshed my memory.
Lululemon China 3Q sales up 24% in constant dollars (Nike is down in China, which is hard to do in a market that continues to grow). Lululemon 'Rest of World' 3Q sales (including China, excluding Americas) up 20% in constant dollars.
Yup, that's quite the 'weak consumer', yet Lululemon trades at about the same PE as Nike while having a much more compelling growth story.
That Nike and their new CEO believes the 'weak consumer' is a big part of their problem is a real cause for concern that they don't understand their problem well enough to turn it around.
The 'consumer weakness' in apparel/sportswear is not a temporary thing. It is a function of demographics and the declining birthrate. That Nike doesn't say this is a red flag. If they don't even understand it, that's even worse.
In the US, there are more people in their 30s than in their 20s. When the people in their 20s become people in their 30s they in turn will outnumber the people who have in their turn grown into their 20s. I suspect it is probably even worse than the US in most Nike markets.
It is roughly the people in their 20s who are spending on apparel/sportswear for status reasons. By the time they are in their 30s, they are paying the mortgage, the SUV, cost of children. Time to be sporty has disappeared, as has interest in demonstrating status to peers by overspending on sports shoes. If the sporty stuff they bought in their 20s still fits, they can wear it. If it no longer fits, they're no longer being sporty and will not replace it with more sporty stuff (Lululemon being a good exception that reinforces the point, which is one reason I like Lululemon).
When it grew, Nike had a lovely tailwind of growing populations of optimistic young people eagerly active in the world. Now they have a headwind of shrinking populations of young people who are less optimistic and increasingly more interested in the world in their devices over the physical world. This may technically be 'consumer weakness', but it is deeply misleading as it isn't what most of us would think of when we read 'consumer weakness'. Consumers continue to spend, in fact they spend more. They are just less interested in Nike.
Nike's challenge to get its mojo back is significantly harder than, and different from, the challenge it had to nurture and grow its mojo. General Motors, for instance, faced a similar set of challenges. Intel...
Nike needs ~3% revenue growth just to stay level with inflation. Then it needs another ~2% growth per customer in its demographic to counter declines in its market. If they are to hit a 7% growth target, they need 6% growth beyond inflation per customer. Nike at its best, without demographic headwinds, without misunderstanding or misdirection about the fundamental challenge it was facing, was not able to achieve this level of success.