Down Over 75%, Here's One Silver Lining that Could Intrigue Nike Investors
Key Points
Nike is still trying to recover from its attempt to become a primarily direct-to-consumer company.
On top of that challenge, Chinese consumers are bailing on Nike in favor of more local brands.
But the sportswear giant is expected to grow its EPS at a higher rate through 2028 than the S&P 500.
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Few brands are as globally known as Nike (NYSE: NKE). It has spent decades building one of the most recognizable brands in the sports world, but unfortunately, Nike's stock has been delivering some of the worst performance we've seen from such an iconic company.
Nike's stock is down over 30% year to date through April 6, continuing a trend that has seen the stock fall by over 75% since its November 2021 highs. It's currently at its lowest price in over a decade.
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With all the negativity surrounding Nike and its stock right now, there is one slight silver lining that could provide a glimpse of hope for long-term investors with patience.
Image source: The Motley Fool.
Where Nike has misstepped
One of the biggest issues with Nike's business is the misguided move to prioritize direct-to-consumer channels (like its SNKRS app) instead of its typical wholesale route. In theory, Nike wanted to cut out the middleman for higher margins. However, it ended up making its shoes harder to get and letting brands like On and Hoka pick up steam. It has since tried to retract and get back to its wholesale roots, but it's not a quick process.
There's also its China problem. The market that once drove much of Nike's growth (and is its third-largest market after North America and EMEA) has experienced significant sales declines. The company said it expects its sales in China to fall by 20% in its current fiscal quarter.
The one silver lining with Nike's finances
Over the next three years, Nike is expected to expand its revenue by a compound annual growth rate (CAGR) of around 3.8%. However, its earnings per share (EPS) is expected to grow at a much faster rate. Some estimates project Nike's EPS to grow at a CAGR of around 25% from 2025 through 2028. That would outpace the projected S&P 500 EPS CAGR of around 15%.
Being able to grow its EPS at that rate -- especially with modest revenue growth expectations -- would mean Nike is operating more efficiently. Ideally, this means Nike has addressed its inventory issues and wholesale relationships, which would be a good step in the right direction for a company that's in the middle of a seemingly long and massive turnaround.
This doesn't always translate into stock price growth, but it shows there's more upside than downside for Nike's stock (though I'd hope that's the case after this performance over the past decade). I would still wait to see some progress before jumping on board.
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Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool has a disclosure policy.
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