It's not easy to be in retail these days. Many retailers are reporting higher-than-expected overstock and continually increasing costs, and price increases can push consumers away.
This is leading to sales and income declines and net losses, even for top companies. You'd think investors would be cheering any company that's beating inflation and posting growth.
But despite it being a blue chip winner pumping out double-digit sales growth, investors are down on Nike(NYSE: NKE). Let's see why this is an opportunity for forward-thinking investors.
Beating out the competition
Nike is by far the leading athletic wear company in the world. It has incredible brand value, and it also has the highest sales of any company in its industry -- more than its biggest competitors, including Adidas, Lululemon Athletica, Under Armour, and Skechers, make combined.
NKE Revenue (TTM) data by YCharts
Its products sit at a comfortable price point that puts them in a premium category but makes them still attainable for the masses. For people who value premium brands and are willing to pay a little extra, Nike's prices aren't too far out of reach. That means it draws customers from a wide range of markets, which isn't an easy feat.
It also means it can charge premium prices, which typically pads the bottom line nicely. But in today's retail climate, this has been harder to accomplish.
A grueling game
Nike pivoted from a more equal balance between its direct-to-consumer business and its wholesale business to a greater focus on the direct-to-consumer business prior to the onset of the pandemic. Its strong brand power gives it the opportunity to forge relationships with customers and leverage that to generate consumer loyalty and higher sales.
This strategy has worked in its favor since inception, but the benefits were on full display in the 2023 fiscal fourth quarter (ended May 31). Sales inched up 5% over last year, but Nike Direct sales increased 15%, while wholesale revenue decreased 2%. Full-year revenue increased 10% over last year.
The direct-to-consumer business consists of both Nike retail stores and its digital experience. Physical stores sales were up 24%, while digital sales rose 14%. That's a healthy balance, and it illustrates the power of the omnichannel strategy, especially where the physical and digital parts work as one.
In Nike's case, it allows customers to reach for digital features while in physical stores. Nike's benefiting from a return to brick-and-mortar shopping while using its web presence to reinforce its branding.
Nike couldn't escape the pressure of rising costs, though, and gross margin contracted by 1.4 percentage points. Earnings per share of $0.66 were down 28% and fell $0.02 below average analyst expectations. That seemed to set off investors.
That seems like nearsightedness to me. Most companies will miss these kinds of expectations on occasion, and this is a tough climate to excel in. Investors ignored sales coming in above expectations.
Just doing it better
Management is actively working to balance inventory and become more efficient. Inventory levels soared last year as retailers weren't prepared for the declining demand, but inventory is normalizing. The closeout mix is also now in line with pre-pandemic levels.
With supply chains and inventory stabilized, management's goal is to unlock more full-priced sales while reacting to whatever changes the economy might bring. CFO Matthew Friend said that Nike is coming into the new fiscal year prepared to deal with any kind of uncertainty and "ready to compete from a position of strength."
Nike is guiding for sales to grow in the mid-single digits and for gross margin to expand for the full fiscal year 2024.
A dividend to top it off
Nike stock is down about 6% this year, and its dividend yields 1.2% at the current price.
That's not a high yield, but Nike has consistently paid its dividend for almost 40 years, and has increased it for the past 15 years consecutively.
Companies that pay a large, high-yielding dividend typically don't offer a tremendous runway for the stock price. Nike stock faltered of late and is underperforming the market, but it has beaten the market over time and can do it again. That gives investors the opportunity for both growth and passive income.
At this price, investors should consider purchasing Nike stock and benefiting from both an income stream, and the chance for market-beating returns later.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica, Nike, Skechers U.s.a., and Under Armour. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
