Down 65%, Should You Buy Nike Stock?

Nike (NYSE: NKE) is the largest activewear company in the world, by far, and the largest of any kind of apparel company in the U.S. However, it's going through some rough times, and the stock is 65% off its all-time high. This could look like a value trap, but if you're looking for a value stock or reliable passive income, and you have the time to wait out the recovery, Nike stock could fit the bill. Here's why.

Where Nike's gone wrong

Nike has nearly $48 billion in trailing 12-month revenue, making it larger than all of its major activewear competitors combined. It's also larger than other major U.S. apparel companies like Gap, American Eagle, and Levi Strauss. It has an unbeatable brand, with the highest brand value in the world at more than $71 billion, according to Statista.

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That has clear implications for its overall health despite recent setbacks. Sales have been declining over the past few years after a number of missteps. It made a major pivot to focus on its direct-to-consumer channels, cutting out long-held wholesale relationships, and the timing was wrong as people cut back on discretionary spending.

In good times, Nike can count on its relationships with its loyal customers across demographics to power higher sales. These days, the majority of that customer group can't buy premium, and the more affluent shoppers are trying new brands like On Holding. It has also lost out to brands focused on performance, like Berkshire Hathaway's Brooks and Deckers Brands' Hoka.

Image source: Nike.

Nike brought back former executive Elliott Hill to lead the company in a turnaround last year, but it's going to take some time to get out of this rut. Not only does it need to redo its strategy, but the external environment is still unfavorable to premium spending.

In the fiscal 2025 third quarter (ended Feb. 28), sales were down 7% from the prior year on a currency neutral basis. Direct-to-consumer sales were worse than the total with a 10% decrease, but Nike's been rebuilding its wholesale partnerships, and wholesale was down 4%.

That's worse for margins, though, and there were other factors sending them down. Gross margin narrowed 3.3 percentage points from last year to 41.5% in Q3. Part of that came from discounting, higher costs, and missing inventory as the company scraps some models and replaces them with new designs that it hopes will revitalize the brand.

There's a way back

With its size and brand power, it doesn't make sense to give up on Nike, and the market is enthusiastic about Hill's chances for success. Despite its declines, Nike remains the industry leader. It's especially resonant with younger shoppers, and it topped Piper Sandler's annual Taking Stock With Kids survey as the favorite footwear brand again this year.

The company is already in the throes of a major strategy shift. It's leaning into sports, with a focus on performance lines, and it's launching new products weekly to keep the brand in shoppers' minds and keep them buying. It's moving away from legacy products and innovating, deepening its brand storytelling, and releasing a greater variety to meet demand across its customer base.

Nike is also reigniting its Wholesale partnerships and redoing its digital channels to bring customers back, starting with paring down promotional activity. Hill noted that in January and February, promotional days in U.S. digital channels went from 30 last year to zero this year. He said that in the third quarter, Nike met its expectations, and that this reinforced his thinking about how Nike needs to change.

The change isn't going to happen overnight, or even in a few quarters. Management explained that while it tightens the Nike Direct marketplace and shifts promotional activity to its factory stores, it expects traffic to decline by double digits before growing again. Shifting back to premium pricing will also concentrate its buyers. Some legacy items will be out of stock while it brings out newer styles.

If this fits your investing profile, "just do it"

There's definitely risk in investing in a company that's on the decline, but that's often where the greatest opportunities lie. Nike is less risky than other turnaround plays because it's still at the top of its industry.

Nike stock won't be the right choice for every investor, but it looks like a good play for the value investor or dividend investor. It's trading at a price-to-earnings (P/E) ratio of 21, well below its three-year average of 28, and the dividend yields 2.5% at the current price. If you're looking for solid passive income and have a long time horizon, Nike could be the right stock for you.

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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Deckers Outdoor, and Nike. The Motley Fool recommends American Eagle Outfitters and On Holding. The Motley Fool has a disclosure policy.