Nike Inc. – Overoptimism Leads to Overvaluation
Let's revisit the Nike investment thesis, going over its recent results, management's commentary, the impact of tariffs, and its medium-term outlook. Are shares a good buy today?
Is it then finally time to buy Nike shares again? Has the company turned its fortunes around? Can it return to its glory days under the lead of Nike veteran Elliott Hill?
Back in late December 2024, I argued shares were compelling at these exact same levels (roughly $76), as I was confident in Nike’s brand and believed Elliot Hill’s renewed strategy for Nike was bang on. Today, my longer-term opinion on the company remains unchanged, although I am not quite sure whether recent investor enthusiasm is warranted.
The company is showing barely any material progress, and management’s commentary has been the same for multiple quarters. I am simply missing any catalysts to inspire confidence in this turnaround.
The company is experiencing a considerable impact from U.S. tariffs, which could be a long-term drag on earnings, especially given the recent Vietnam trade deal, which suggests these tariffs are unlikely to be resolved anytime soon. Pricing this in, we could be looking at depressed earnings for longer and even demand destruction amid price hikes. Not a great backdrop, is it?
Not quite a lot of reason for optimism, right? In my opinion, nothing has changed from a few weeks back – certainly not enough to shift the narrative or remove any doubts. If anything, Nike’s medium-term outlook has become more complicated.
Yet, its share price is up a whopping 25% over the last month, and shares are back trading at over 40 times earnings. With the medium-term earnings recovery likely not as swift as previously expected, that is far from ideal. I mean, that's about 25 times fiscal FY28 earnings…
Anyway, since it’s been six months since my last coverage of the company, and plenty has happened, let’s make up the balance again.
Let me walk you through the results, recent developments, the tariff headwind, and then my updated financial projections, concluding with my thoughts on Nike shares.
Let’s delve in!
A kitchen-sink quarter
Back in late June, Nike released its latest quarterly results (fiscal Q4), which were met with considerable investor enthusiasm. Shares gained roughly 15% in the following trading session and have since maintained those gains, now up 25% over the last 30 days.
So, were the results really that good? Well, yes and no. While Nike’s results show profound weaknesses across the board, reported minimal fundamental progress (management simply repeats itself), and its medium-term outlook is only becoming cloudier amid high tariffs, economic uncertainty, and price hikes, there are some positive indications that might have brought some relief for investors.
Nike did beat consensus estimates by a fine margin, delivered fiscal FY25 results above my December estimates, and management indicates this was its kitchen sink quarter, with better times ahead. Yes, Nike management clearly admits that the results are far below its standard, even though they were slightly better than expected; more importantly, the results have likely hit bottom. Here’s a quote from the earnings call:
“From here, we expect our business results to improve. It's time to turn the page.”
Indeed, management indicates that its results have bottomed in fiscal Q4, which is obviously somewhat of a relief, although there is a big asterisk; more on that later.
Focusing first on the Q4 results, Nike reported a 12% decline in revenue to $11.1 billion, reflecting a further deterioration from prior quarters amid ongoing demand weakness and increased promotional activity to clear old inventory across all regions.
This brought the fiscal FY25 result to a 10% decline in revenue to $46.4 billion.
The decline was driven by weakness in all regions. In North America, revenue declined by 11%, primarily due to a 14% decrease in Nike Direct revenue and an 8% decline in wholesale revenue. Notably, management has made meaningful progress in cleaning up its marketplace and repositioning Nike Digital as a full-price model, which we define as a higher-end store with more exclusive products and limited promotions.
Under Nike’s new strategy, the company aims to return to its roots, leveraging wholesale partners for broader visibility and sales, while its Direct channel will be more exclusive. Currently, in North America, management is still in the process of aligning itself with this strategy, terminating excess inventory through high promotions, and introducing newness to the wholesale product portfolio. This takes some time, but it should pay off later, though it is a big drag on the results right now.
However, the first results are becoming visible, with inventory down YoY and a higher share of demand at full price in the quarter.
Moving to Europe, Nike looks slightly better. Yes, revenue was still down by 10%, due to a 19% decline in Direct revenues and a 4% drop in Wholesale, but EMEA is the furthest along in cleaning up the marketplace and repositioning NIKE Digital.
In the EMEA region, Nike is already experiencing a return to growth in certain categories, including sportswear and footwear. Furthermore, inventory units were down mid-single digits, slightly ahead of target, and the share of demand at full price was up double digits. So, there has been some good progress here, which positions it for a recovery and gives management room to execute its strategy.
Finally, in China, the results were really poor. Revenue was down 20% YoY, driven by a 15% decline in Direct revenues and a 24% decline in Wholesale. Here, Nike needed to conduct a deeper inventory reset relative to other regions, which is a considerable drag on the results here. Additionally, traffic remains challenged, which isn’t helping either. On a positive note, inventory was down 11% YoY, driven by these aggressive reductions. Nevertheless, there is still a lot of progress to be made here.
As for the overall channel performance, Nike Direct was down 14% YoY, driven by a 26% decline in digital sales and a minor 2% increase in Nike stores. Furthermore, Wholesale was down 9% YoY amid continued broader weakness.
The outperformance in Wholesale is no surprise, though. Management has been working hard in recent quarters to revitalize wholesale relations as part of its new strategic push. You see, in recent years, Nike has pushed for a higher share of DTC (Direct-to-Consumer) sales, as these carry higher margins and give Nike greater control over the entire experience and supply chain.
However, this strategy has backfired. It turns out that pulling your products from all those physical retailers (where they are most visible and available to the broader public) and selling most of them solely through your online channels, along with a limited number of physical stores, isn’t the best way to reach your customers. It led to poor product availability and visibility, which (surprise, surprise) led to falling consumer interest and sales. Ultimately, only customers targeting Nike products will now find them, which did hurt its business.
Additionally, all those shelves at companies like Dick’s, JD, and Foot Locker became filled with Nike competitors. Market share losses for Nike resulted, which, at least in hindsight, is no surprise.
Anyway, under Hill, Nike is turning the ship around, and wholesale as a percentage of revenue is growing again, as visualized below – a very positive long-term development.
And management is still putting significant efforts into rekindling these relationships, aiming for wholesale to be its primary revenue source, with Nike Direct (stores and online channels) serving as a more premium destination.
As for wholesale, Nike is investing heavily in hiring teams for retail marketing, visual merchandising, and account management to better serve its partners. Additionally, the company announced a new partnership with Amazon, which will feature a select assortment of footwear, apparel, and accessories in a dedicated brand store on the platform, focusing on running, training, basketball, and sportswear. This signals a clear, continued shift away from the DTC strategy and a clear focus on wholesale, which I believe is the right strategy.
Meanwhile, Nike is reducing inventory and creating a less promotional marketplace, which also helps it gain the confidence of its wholesale partners and is expected to boost results in the coming quarters.
These are actually good developments.
Beyond this, management mostly reiterated its strategic priorities, with little new information. However, there are a few important developments to highlight.