Into the New: Is Nike Stock a Buy After CEO Change?

It’s been a tough stretch for the sportswear and footwear giant NIKE (NKE -0.06%). The company, famous for its Swoosh logo, has lost its growth momentum after several excellent years since the start of the pandemic. Today, investors question the company’s competitive edge, as do emerging competitors Deckers Brandswhich sells Hoka sneakers, have enjoyed solid success.

Nike became concerned enough to fire CEO John Donahoe to bring back former executive Elliott Hill to lead the company’s turnaround. Stocks have bounced back on the news, but remain 50% below their former high and lagging well behind the broader stock market.

Should investors buy the turnaround? Or are Nike’s best days behind it?

What went wrong at Nike?

Retail is extremely competitive, but when you’re the top brand like Nike is in sneakers, you get the best shelf space in the store. Nike’s ability to occupy shelf space has been a competitive moat for decades. However, once former CEO John Donahoe took over in early 2020, the company focused on building its direct-to-consumer sales model.

At face value, a direct-to-consumer model isn’t a terrible idea. Nike can increase their profit margins and have more control over how they market their products. But Nike didn’t foresee the downsides of the strategy before leaning too hard in that direction.

For example, wholesalers take a lot of logistical hassles off the manufacturer’s plate. That was left up to Nike to figure out. And that coveted shelf space? Nike gave much of this to competitors by pulling out of retailers, even going out of business with some of them.

Simply put, Nike put so much emphasis on its direct strategy that it opened the door to retail competition. Nike acknowledged this in recent quarters, before Donahoe resigned. Elliott Hill, who retired from Nike in 2020, will return as CEO on October 14. He previously led company-wide commercial and marketing operations for the Nike and Jordan brands.

No, Nike is not dead

The great thing about dominant companies is that a few years of bad management usually isn’t enough to destroy the business. I’ve seen feelings sour to the point where people think Nike is toast. I’d say it’s highly unlikely (I could be wrong, of course). It comes down to a few simple facts.

Nike is still the giant that rules the sports world:

NKE Revenue (TTM) data by YCharts

Sure, there’s competition, but Nike is still bigger than most of its main competitors combined. It still has the deepest pockets, the biggest advertising budget and a list of top sponsorships including Michael Jordan, LeBron James, Caitlin Clark and dozens more. Nike is the de facto leading Olympic apparel brand and has licensing deals with the NFL, NBA and MLB.

You could argue that Nike may have lost some ground in niche categories like running or athleisure. Competitors like Hoka and Lululemon Athletica they excelled here. However, Nike’s sales fell only slightly after tremendous growth. It seems premature to say that Nike is in trouble. In any case, investors should applaud the company for taking drastic action before sales fell enough to cause real trouble.

But is the stock a buy?

Nike’s iconic brand, consistent top-line and bottom-line growth, and outstanding long-term stock performance have typically held a premium over the years. Over the past decade, Nike has traded at an average price-to-earnings (P/E) ratio of 37. The problem with a sustained premium like Nike’s is that it can get messy if something happens and the market stops paying. that price. Investors have seen it, with Nike still down 50% from its all-time highs.

What matters now is where the Swoosh goes from here.

Analysts expect Nike to take a big step back this year. Full-year earnings estimates of $3.03 per share are nearly a dollar lower than last year’s $3.95. So the stock becomes more expensive when you value it on forward earnings. The stock is trading at 30 times estimated 2024 earnings, about 20% below its long-term average.

At the same time, analysts believe Nike will grow earnings by an average of 12% annually over the next three to five years. In other words, 2024 is a reset year for Nike before double-digit revenue growth returns. If that plays out, today’s dip looks like a solid buying opportunity for long-term investors.

Unfortunately, blue chip stocks rarely come cheap. It often takes a market crash or some bumps and bruises for stocks to fall. Nike needs to live up to expectations, but that’s the risk you take to buy stock for less. The company’s solid fundamentals and long-standing brand strength indicate that the Swoosh is OK for the long haul.