After Earnings, Is Nike Stock a Buy, a Sell, or Fairly Valued?

Nike released its fiscal first-quarter earnings report on Oct.1, after the close of trading. Here’s Morningstar’s take on Nike’s earnings and stock.

Key Morningstar Metrics for Nike

• Fair Value Estimate: $117.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Nike’s Fiscal Q1 Earnings

• Sales fell 10% in the quarter—a poor result, but it matched our forecast. Despite this, earnings per share of $0.70 beat our $0.51 estimate. Earnings benefited from cost cuts and a 45.4% gross margin, which was 90 basis points better than our estimate. Nike has consistently outperformed EPS estimates despite slow sales.
• Nike withdrew its full-year guidance but disclosed that sales and margin improvement are developing more slowly than expected. Consequently, we lowered our fiscal year 2025 sales forecast to a 7% drop from 5%, and our earning per share estimate to $2.77 from $3.09.
• The earnings report was handled by CFO Matt Friend, as new CEO Elliott Hill has not yet officially started. Nike planned to hold an investor day in November, but thas postponed it indefinitely due to the CEO change.

Fair Value Estimate for Nike

With its 4-star rating, we believe Nike’s stock is undervalued compared with our long-term fair value estimate of $117 per share. The company’s fiscal 2025 first-quarter earnings per share of $0.70 surpassed our $0.51 estimate. However, its quarterly sales fell 10%, and it guided for a slow recovery in sales and margins due to uncertain economic conditions in key markets and weak demand for some lifestyle and footwear products. Indeed, second-quarter sales are set to fall 8%-10%. Our fair value estimate implies a fiscal 2025 price/earnings ratio of 42 and an enterprise value/adjusted EBITDA ratio of 30.

Despite the anticipated sales decline in fiscal 2025, we forecast compound average sales growth of 5% over the next 10 years. We expect it will achieve compound annual revenue growth of 2% in North America, perhaps slightly below expected market growth. We think Nike’s innovative products and e-commerce will allow it to hold its market position and premium pricing, but we acknowledge that the market has become very competitive. In Greater China, Nike’s fastest-growing segment before recent challenges (such as virus-related lockdowns and the forced labor controversy), we expect compound average growth of 11% over the next decade.

Read more about Nike’s fair value estimate.

Economic Moat Rating

We assign Nike a wide moat based on its brand intangible asset. It is the world’s largest athletic apparel and footwear company, with over $50 billion in annual revenue. Its sales have increased in 13 of the past 14 years, with the pandemic-affected fiscal 2020 as the sole exception.

Nike’s adjusted returns on invested capital, including goodwill, have averaged 35% over the past five fiscal years, well above our 8.6% estimated weighted average cost of capital. Moreover, we forecast that the company’s annual adjusted ROICs, including goodwill, will average 39% over the next decade and exceed its WACC for at least the next 20 years. Nike’s ROICs possibly get a boost from the firm’s outsourcing of production to third-party factories, but we believe its returns on investment would be high even if its asset base were larger.

Read more about Nike’s economic moat.

Financial Strength

We believe Nike is in excellent financial shape to weather the apparel industry’s many challenges, including elevated inventories, higher costs, a strong US dollar, and the impact of inflation on consumer spending. At the end of August 2024, Nike’s $10.3 billion in cash and short-term investments exceeded its debt of $9 billion. In addition, the firm had undrawn short-term credit facilities of $3 billion and a separate $3 billion commercial paper facility.

Most of Nike’s long-term debt does not mature until after 2028, but it has significant endorsement commitments of more than $1 billion per year. With its investment-grade credit ratings, the firm could easily increase debt for stock repurchases or other uses. It may also make acquisitions, although these are likely to be technology-focused and fiscally immaterial.

Read more about Nike’s financial strength.

Risk and Uncertainty

Our Uncertainty Rating for Nike is Medium. The company struggled with supply chain problems and excess inventory in 2021-22, but it has made progress in fixing these issues.

Nike is vulnerable to weakness in US physical retail. Department stores that carry its products have been downsizing and cutting orders. However, the firm should be able to make up for slowness in some retail areas through direct-to-consumer sales.

As a global business, Nike is affected by economic conditions in many parts of the world. Consumer spending on the company’s products has been uneven due to inflation, war, currency movement, trade restrictions, and other issues.

Read more about Nike’s risk and uncertainty.

NKE Bulls Say

• Although uneven of late, the global sportswear market should expand, especially in Asia and other developing areas. As the share leader in most countries, Nike is positioned to benefit.
• Nike’s restructuring efforts to achieve $2 billion in cost cuts and its “Triple Double” strategy (increased innovation, direct-to-consumer sales, and speed) should allow for improved margins.
• Somewhat depressed lately, we anticipate Nike’s gross margins will rise through automation, e-commerce, and higher prices. Nike is pulling back from undifferentiated retailers to increase full-priced sales.

NKE Bears Say

• As a worldwide business, Nike has felt the effects of the war in Ukraine, shipping delays, currency volatility, and inflation. These and other issues could continue to impact its results.
• The Chinese sportswear market is increasingly competitive. Nationalistic sentiment has boosted native brands, and international brands like Lululemon have expanded. Nike must continue to lead this market to meet long-term profit goals.
• Nike’s dominance in running shoes has been challenged by the success of relative newcomers like Hoka and On. It has fallen behind some others in innovation.

This article was compiled by Sokhoeun Noeut.