What we think about NIKE (NKE)

NIKE has had its challenges in recent years, but its stock is also being priced like an old and worn-out pair of sneakers.

At $77 per share, NIKE is selling for just 22x trailing earnings and 16x trailing free cash flow. That's too cheap, and it's not factoring in the potential of a turnaround from its new CEO Elliott Hill.

This is an intriguing turnaround story. NIKE's still far from completing the marathon, but it's an investment worth cheering for.

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Background

Nike is the world's largest supplier of athletic shoes and apparel. It does $50 billion of annual sales and operates in 190 countries.

With a global market share of 39% of all sportswear sold and a roster of sporting brand ambassadors that is second to none, NIKE is a household name the world over. It's known for creating innovative and cutting-edge sporting products, with a focus on lightweight, breathable materials that enable movement, comfort and design.

Yet NIKE has also struggled with several challenges in recent years. Earlier in 2024, it reported a (8%) year-over-year decline in quarterly revenues from NIKE Direct, which are its NIKE-owned retail stores and NIKE digital platforms. The company began transforming itself into a digital-first, direct-to-consumer (D2C) company six years ago, exiting non-strategic wholesale channels to build closer relationships with customers. These investments have not borne fruit, as digital sales involve greater competition and entirely new working capital challenges.

Although the NIKE Direct revenue decline negatively impacts gross margins (resulting from operating lease agreements for retail spaces, plus continued investment in digital technologies), overall, gross margins improved to 44.7%, led by strategic pricing actions and lower ocean freight rates and logistics costs. Inventories have also improved to $7.5 billion (-10% YoY), but these remain high vs pre-pandemic levels.

Conviction Update:

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Thoughts on Current Valuation and Capital Allocation

December 15, 2024:

Nike's stock is simply too cheap right now. It's currently selling for just 22x trailing earnings and 16x trailing free cash flow; and that denominator is based on a poor business strategy that's been hurting the bottom line.

I expect Nike will execute well on a new strategic plan, then pull the trigger on some or all of its $8 billion repurchase authorization to buy back its own stock at an extreme bargain.

In the meantime, it just raised its dividend 8% and the stock now yields 2.1%. Nike is an intriguing turnaround story that is worth cheering for.

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