Nike, a household name synonymous with athletic wear and an iconic brand in the fashion world, has been facing a challenging year. The sportswear giant’s stock is down more than 24% in 2023, marking a significant decline. However, for long-term investors, this dip presents a compelling opportunity. Despite the recent challenges, Nike’s strong brand loyalty, healthy financials, and promising moves towards correcting past mistakes make it a stock worth holding onto.
Strong Brand Endures Despite Stock Decline
Nike’s stock performance may be struggling, but its brand remains as powerful as ever. Few companies in the fashion or athletic apparel industries can match Nike’s global recognition and dominance, particularly in the footwear market. For decades, Nike has been the go-to brand for athletes, casual wearers, and fashion enthusiasts alike. This brand power provides the company with significant customer loyalty and pricing flexibility, allowing it to maintain a healthy financial position even during difficult times.
In its fiscal year 2024, which ended on May 31, Nike reported $51.4 billion in revenue. While this represents just a 1% year-over-year growth, it is still more than the combined revenue of major competitors such as Adidas, Puma, Under Armour, Skechers, and Deckers Outdoor. This strong revenue performance highlights Nike’s ability to maintain its market dominance, even as the company navigates financial headwinds.
Rebuilding Wholesale Partnerships
One of the key missteps Nike made in recent years was its shift away from wholesale partnerships. As the company leaned into its direct-to-consumer (D2C) strategy, fueled by the rise of online shopping and the success of its SNKRS app, it cut ties with several major retailers. This decision, however, negatively impacted Nike’s wholesale sales. The growth in D2C sales wasn’t enough to offset the decline from these lost partnerships.
Recognizing the mistake, Nike has worked to rebuild relationships with many of its former retail partners. After severing ties with companies like Macy’s, Designer Brands (DSW), and Urban Outfitters in 2021, Nike began reversing this course by 2023. Since re-establishing these wholesale relationships, Nike’s wholesale business has experienced renewed growth, with an 8% year-over-year increase in revenue in its latest quarter, totaling $7.1 billion.
This resurgence in wholesale sales is a positive sign that Nike is focusing more on maximizing every possible sales channel. By balancing its D2C ambitions with its wholesale operations, the company is positioning itself to regain lost ground and further strengthen its financial performance.
A Favorable Valuation for Long-Term Investors
While Nike’s stock price has shed more than half of its value since its peak in November 2021, this decline may actually present an opportunity for investors looking for long-term gains. Just a few years ago, Nike’s price-to-earnings (P/E) ratio was hovering in the 80s, reflecting a premium valuation. More recently, this ratio has dropped into the low 20s, a more reasonable level that reflects fewer risks compared to when the stock was priced at a premium.
For potential investors, this lower valuation means that the stock is currently more affordable, with significant upside potential. Additionally, Nike offers an above-average dividend of 1.8%, which can help mitigate some of the stock price volatility and provide a steady stream of income for shareholders.
With its strong brand power, recovering wholesale business, and more attractive valuation, Nike remains a solid choice for those seeking a stock to buy and hold for the long term.
The Path Forward
While Nike is undoubtedly going through a rough patch, the company’s overall outlook remains positive. Its continued ability to generate significant revenue, rebuild lost partnerships, and maintain a healthy balance sheet suggests that Nike is well-positioned for future success. The brand’s enduring popularity, combined with strategic adjustments to its business model, signals that Nike is likely to recover from its current slump.
For long-term investors, now could be one of the best opportunities to buy into this iconic company. With a dividend that outpaces many of its competitors and a stock price that offers significant growth potential, Nike could be a rewarding addition to any portfolio, especially for those with the patience to ride out the current challenges.
