Nike Stock Could Rise 2x If It Recovers To Pre-Inflation Shock Highs

[Note: Nike fiscal year ends in May]

Nike’s stock (NYSE: NKE), a company designing, developing, and marketing footwear, apparel, equipment, and accessory products, currently trades at $77 per share (Dec 16), around 55% below its level of $170 seen on November 2021 (pre-inflation shock high), and has the potential for gains. Nike’s growth momentum has stalled following a strong post-pandemic performance, prompting a leadership change with the return of former executive Elliott Hill as CEO. The company experienced a 10% year-over-year revenue decline to $11.6 billion in the fiscal first quarter, driven by a 20% drop in Nike brand digital sales and a 13% decline in Nike Direct revenue. Wholesale revenue also decreased by 8%, and the retailer’s sales declined across all geographic regions in the first quarter. Also, the athleisure giant’s reported diluted earnings per share of $0.70, down 26% y-o-y, during the same period.

The company is scheduled to announce its second-quarter earnings on Thursday, 19th December. For the fiscal second quarter, revenue is expected to decline 8-10% and gross margin to contract by 150 basis points, indicating a significant earnings per share decline. Management has signaled that fiscal 2025 will be a transitional year, emphasizing the need for continued innovation and operational efficiencies to address current challenges. A key focus area will be revitalizing digital engagement to help recover from the 20% decline in Q1. Nike’s stock is down almost 28% year-to-date. In comparison, Nike’s peer Lululemon’s (NASDAQ: LULU) stock is down 23% since the beginning of this year. Separately, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.

Returning to the pre-inflation shock level means that NKE will have to gain about 120% from here. While it has the potential to recover to those levels eventually, we estimate NKE’s Valuation to be around $91 per share, almost 18% higher than the current market price. Our detailed analysis of NKE’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession. Despite increased competition, Nike remains the industry leader, boasting unparalleled scale, financial resources, and a robust portfolio of high-profile sponsorships and licensing agreements, including partnerships with the NFL, NBA, and the Olympics. Nike’s gross margin expanded 120 basis points to 45.4% in Q1, driven by reduced product and warehousing costs, as well as strategic pricing initiatives implemented over the past year. Meanwhile, the company’s demand creation expense, which encompasses marketing spending, increased 15% to $1.2 billion, reflecting heightened investment in brand marketing efforts around major sports events.

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Notably, NKE stock has performed worse than the broader market in each of the last 3 years Returns for the stock were 19% in 2021, -29% in 2022, and -6% in 2023.

In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could NKE face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to a high demand for goods; producers were unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, and it saw a rate cut in September 2024.

In contrast, here’s how NKE stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

NKE and S&P 500 Performance During 2007-08 Crisis

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NKE stock fell from nearly $15 in October 2007 (pre-crisis peak) to almost $10 in March 2009 (when the markets bottomed out), implying that NKE stock lost almost 30% of its pre-crisis value. It grew from the 2008 crisis to levels of around $17 in early 2010, rising roughly 59% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of $1,540 in September 2007 to $757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of $1,124.

NKE Fundamentals Over Recent Years

NKE revenues grew 15% from $44.5 billion in FY 2021 to $51.4 billion in FY 2024. During the same period, the company’s EPS grew 5% to 3.78 in FY’24. Nike’s margins have stayed within a tight range for a long time due to its mature nature of business. However, Its gross margin rose 110 basis points to 44.6% in fiscal 2024. A combination of lower freight costs and higher prices for some premium products drove this expansion.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe NKE stock has the potential for strong gains once its turnaround efforts gain steam.

It is helpful to see how its peers stack up. NKE Peers shows how Nike’s stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.

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