Note: Nike’s FY’23 ended on May 31, 2023.
After almost a 7% decline year-t0-date, at the current price of around $109 per share, we believe Nike stock (NYSE: NKE), a company designing, developing, and marketing footwear, apparel, equipment, and accessory products – could see gains in the longer term. NKE stock has declined from around $117 to $109 YTD, underperforming the broader indices, with the S&P growing about 16% over the same period. The company’s gross margin came down 240 basis points to 43.5% in FY 2023, due to promotional activities and higher cost of goods sold (COGS) overall, as well as the negative impact of exchange rates. Consequently, Nike’s profits suffered due to heavy promotional activity and slower market growth. While the company’s profitability will likely be pressured in the short term due to advertising activity, the long-term outlook for the company looks quite stable. Nike has managed to make progress in reducing inventory surplus in Q4. Its inventories were unchanged from the same period a year earlier but were down 13% from their peak in Q1 2023. A number of sporting events, including the women’s soccer world cup and the Kobe brand’s relaunch, are also expected to drive sales. There is also potential for the Jordan brand to grow in the international markets. Also, the company’s ability to leverage China’s recovery is a big positive for the company. As such, Nike’s sales in China grew by double-digits for the company during the June 18th shopping festival, the country’s annual shopping festival.
Nike reported Q4 revenue of $12.83 billion, up 5% year-over-year (y-o-y). In the fiscal fourth quarter, Nike Direct sales were up 15% to $5.5 billion on a reported basis. A rise in revenue in Greater China (16%) outpaced the revenue growth recorded in the Asia Pacific & Latin America (+5%), North America (+5%), and Europe, Middle East, & Africa (+3%). Footwear revenue rose 7% to $8.55B, while apparel revenue was flat compared to a year ago at $3.23B. However, the company’s GAAP earnings came in at $0.66 per share and were down 27% y-o-y.
We forecast Nike’s Revenues to be $54.3 billion for the fiscal year 2024, up 6% y-o-y. We forecast earnings per share (EPS) to come in at $3.73. Given the changes to our revenues and EPS forecast, we have revised our Nike’s Valuation to $123 per share, based on a $3.73 expected EPS and a 33.1x P/E multiple for the fiscal year 2024 – almost 12% higher than the current market price. That said, the company’s stock appears cheap at the current market price.
In FY 2024, management expects sales to grow by mid-single-digits and gross margin to increase by 140-160 basis points and operating margin by 200 points due to better freight rates, a slight decrease in advertising activity, and continued acceleration in Direct sales. It should be noted that its selling, general, and administrative costs are expected to outpace revenue growth due to increased marketing spending.
Notably, NKE stock had a Sharpe Ratio of 0.5 since early 2017, which is slightly lower than the figure of 0.6 for the S&P 500 Index over the same period. Compare this with the Sharpe of 1.2 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
|S&P 500 Return||-3%||16%||100%|
|Trefis Multi-Strategy Portfolio||-6%||21%||290%|
 Month-to-date and year-to-date as of 8/11/2023
 Cumulative total returns since the end of 2016
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