Nike Stock Keeps Falling. Time to Buy?

Nike (NYSE: NKE) is a ubiquitous sportswear brand with a trailing 12-month revenue of $49 billion. But after a decade of market-beating returns, Nike's stock has been crushed over the last year by weakening sales trends.

The stock trades down 60% from its previous peak, which looks tempting for value investors. The lower share price means that investors can buy the stock at a lower multiple of Nike's sales and earnings. Plus, Nike is still paying dividends, so the stock's haircut has brought its dividend yield to a 15-year high.

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These indicators suggest that the shares are undervalued, and it's attracting investment from some of the smartest investors around. Billionaire Bill Ackman and other notable fund managers started positions in Nike stock last year.

Is it time to buy this beaten-down sportswear leader?

A turnaround could take time

Nike's sales were down 8% year over year in the November-ending quarter, and analysts who cover the company on Wall Street expect full-year sales for the May-ending fiscal year to be down 10% year over year. Lower sales are also taking their toll on the bottom line, with Nike's earnings expected to be down 45% for the current fiscal year.

Some of Nike's problems are self-inflicted. For example, new CEO Elliott Hill is implementing a strategy to reduce the reliance on promotional discounts to drive more full-price sales. This should lead to stronger profitability over the long term. The company is also boosting investment in sports, which should benefit Nike's core products like running and basketball shoes.

There is a trade-off in the near term. As Nike reduces promotional sales, people who have gotten used to Nike's discounts may turn to other brands, and that could further pressure sales. Because of this, it could take several quarters before Nike starts showing a significant improvement in financial results.

Increasing competition

Investors should also be aware that Nike is facing greater competition in the marketplace, which raises uncertainty about the timing of a turnaround. Over the last few years, competitors like Lululemon Athletica (NASDAQ: LULU), On Holding (NYSE: ONON), and Deckers Outdoor's (NYSE: DECK) Hoka have all delivered stronger sales growth than Nike.

Lululemon's revenue grew 9% year over year last quarter, and while Lululemon is mostly focused on premium apparel, management has noted success in growing its new footwear line.

Meanwhile, On's footwear is gaining wider appeal, with sales soaring 32% over the year-ago quarter. Additionally, Deckers reported a 20% year-over-year increase in sales last quarter, as it continued to report strong demand for its Hoka running shoe.

In comparison, sales of Nike's footwear tumbled 11% over the year-ago quarter. Nike's running shoes performed better, with sales flat in the men's category and up single-digit percentages in women's, but it seems to be losing market share to competitors.

Nike can win, but it may get worse before it gets better

But it's not game over for Nike. The one advantage it has that these other brands don't is massive scale and global reach. The company's marketing expense was almost double On Holding's total revenue over the last year. Obviously, that didn't prevent the company's sales from falling, but historically, Nike has demonstrated that it knows how to build brand awareness better than anyone. Marketing and innovation are why Nike is the industry leader. As it adjusts its product strategy and marketing message, Nike can energize sales again.

That said, investors may want to wait to buy the stock until there is better visibility on sales. The stock is sitting close to new lows at the time of this writing, and there is a real risk that Nike could struggle to grow sales in the near term, which could send the stock down to new lows before it rebounds.

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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Deckers Outdoor, Lululemon Athletica, and Nike. The Motley Fool recommends On Holding. The Motley Fool has a disclosure policy.