Nike: Bull vs Bear | The Pied Fool

NIKE (NKE 1.58%) has spent decades building one of the most recognizable brands globally. It is one of the leading sneaker and apparel companies and has worked its way to a market cap of over $130 billion. Unfortunately for Nike and its shareholders, however, its market cap has topped $280 billion.

Nike has had its share of struggles in recent years, that’s for sure. But that doesn’t mean all hope is lost. Or does it? Well, let’s see, as these two Motley Fool contributors present the bull case and the bear case for this well-known name.

A change of course from an admitted mistake

Stefon Walters (Taurus): On September 19, Nike announced that its CEO, John Donahoe, would be replaced by Elliott Hill. Donahoe has held the position since January 2020, but the move was all but inevitable given the company’s struggles and missteps.

Arguably Nike’s biggest misstep under Donahoe was its overoptimism about how well it could thrive by relying heavily on a direct-to-consumer model. The company has always relied on intermediaries to bring its products to consumers. Department stores, sporting goods retailers, and the like played an important role in Nike distribution.

But the growth of online orders and the success of its popular app, SNRKS, led management to believe it could eliminate those stores. It has severed ties with major retailers such as Macy’s, Urban Outfitters, Dillard’sand a handful of others. This turned out to be a major miscalculation.

Hill has the advantage of seeing this misstep and bringing Nike back to its balanced model, which should help sales. It won’t be an overnight transition (though the company has already rekindled some of its retail relationships), but there’s a world-class brand to lean on in the meantime.

Nike’s brand value was estimated to be over $53 billion in 2023, more than three times the value of its biggest competitor. sneakers. Don’t underestimate the freedom of action this provides.

Image source: Statista.

With the change in leadership and an above-average dividend yield, Nike should be able to get some breathing room from investors. It has the pricing power to keep its financials healthy and the consumer base to provide a solid foundation while it corrects its mistakes.

Running shoes are booming — Nike is not

Howard Smith (Bear): There is no doubt that Nike is an iconic brand. People all over the world recognize the ‘swoosh’ logo made famous by NBA legend Michael Jordan and other brand ambassadors. But lately, business hasn’t flown as high as Jordan in his famous diving picture.

In fact, its stock returns have lagged a lot S&P 500 index for years. Since Nike last split its stock — 2-for-1 on Dec. 24, 2015 — its total return (including dividends) is 41%, compared to the index’s roughly 220%.

Of course, consumers can be fickle, fashion trends can change, and companies can recover from mistakes. But what’s wrong with Nike isn’t something the company itself can easily turn around. It recognizes the need for change and has announced it will replace its CEO next month. Meanwhile, new innovative brands have reached consumers.

However, smaller competitors like it Outdoor deckers (DECK 1.79%) and On Holding (ONON 2.73%) they have surpassed Nike by several years. Deckers’ Hoka brand and On athletic shoes grew in popularity. As can be seen below, revenue growth on a trailing 12-month basis for both companies has outpaced that of Nike over the past three years.

NKE Revenue Data (TTM) by YCharts.

It’s true that Nike is a much larger company than those competitors, which makes it harder for them to grow quickly from a much larger revenue base. But the point is, the athletic shoe market is booming right now, and Nike’s business is not. In the US alone, the running shoe market is expected to continue to grow for at least the next four years.

Image source: Statista.

It remains to be seen what turnaround plan the incoming CEO might have in mind. Some investors may be content to collect the dividends while they wait. But for those looking for growth, Nike is not the place.