Despite the challenges NIKE remains committed to drive the growth of sports in China.
Introduction
The company's multiyear innovation cycle has been mainly focused on increasing its speed to the consumer. For years, NIKE has used the Express Lane to facilitate short-lead-time replenishment and hyperlocal design, and it expects to continue leveraging this. However, in the past year, NIKE has developed a new approach across the entire product creation process. This is called the Speed Lane, a broader company-wide effort to move faster and be more responsive to the consumer. In the second half of fiscal 2025, the company expects to see additional innovations to be launched from Speed Lane, including several exciting new franchises in fitness and lifestyle.
Bull Case
Long-Term Playbook: Despite the ongoing challenges, management is on track with its actions to reposition NIKE to be more competitive, and drive sustainable, profitable long-term growth. The company is intensifying its focus on sports, speeding up the introduction and expansion of new products and innovations. NKE is also enhancing its storytelling efforts with greater impact and boldness while elevating the overall marketplace to strengthen brand distinction and align with consumer preferences. Additionally, the company is accelerating its innovation pipeline, advancing several innovations. It is taking bold steps to reclaim its leading edge in innovation. Focus on its sports performance product category has been the key to its strategy.
Strategic Actions on Track: Elliott has laid out a series of strategic actions to reposition the business and revitalize the momentum of the NIKE brand through sport. Some of these initiatives are already in progress, and the company is accelerating implementation while others are newly introduced. Notably, NIKE is transitioning its digital platform to a full-price model and reducing the reliance on promotional activity. Concurrently, the company is scaling back its investment in performance marketing, which will reduce paid traffic.
Plans for NIKE Digital: CEO Elliot noted that traffic in NIKE Direct, both online and in physical stores, has declined due to a lack of product innovation and inspiring narratives. This has led to an over-reliance on promotions. The company has shifted to a pushed model, with digital platforms showing a near 50-50 split between full-price and promotional sales at the start of fiscal 2025. NIKE Digital has been capturing demand, but competing with wholesale partners instead of creating new demand for its brands. As a result, the company is refocusing on enhancing the consumer experience, growing organic traffic, and driving full-price sales, as outlined by Elliot. Being a premium brand means focusing on full-price sales, with promotions limited to key retail periods rather than the current frequency. Additionally, NKE will explore using NIKE value stores to clear excess inventory.
Strong Financials & Sustained Shareholder Returns: NIKE ended second-quarter fiscal 2025 with strong liquidity, which included cash and short-term investments of $9.8 billion. Its long-term debt of $7.97 billion was almost flat from the prior quarter. For the past 14 years, the company has distributed regular dividends and made share repurchases to improve shareholder returns. In second-quarter fiscal 2025, the company returned $1.6 billion to shareholders, including $1.1 billion in share repurchases and $557 million in dividends. As of Nov. 30, NIKE repurchased 112.8 million shares for $11.3 billion as part of its four-year $18-billion share repurchase program approved in June 2022. NIKE has a dividend payout ratio of 38%, annualized dividend yield of 2.2% and free cash flow yield of 5.2%.
Bear Case
Shares Decline, Appear Overvalued: Shares of NKE lost 29% in the past year compared with the industry's decline of 22.3%. NIKE's dismal share performance indicates ongoing challenges for the company, further highlighted by its disappointing second-quarter fiscal 2025 results. In the quarter, NIKE faced continued pressure from weak sales in its lifestyle segment, declining digital revenues, and challenges in the Greater China market, leading to slower revenue growth and squeezed profit margins.
Considering price-to-earnings (P/E) ratio, NIKE looks overvalued compared with the industry. The stock has a trailing 12-month P/E ratio of 32.86X, which is above the median level of 25.97X but below the high level of 36.15X, scaled in the past year. On the contrary, the trailing 12-month P/E ratio is 26.17X for the industry. Given these factors, we believe that the stock is quite stretched from the P/E aspect.
Franchise Management Actions: NKE has experienced sluggish sales trends in its lifestyle segment, including men's, women's, and Jordan. As outlined in first-quarter fiscal 2025, the company is progressing with its plans to adjust timelines and reduce the overall supply of select classic footwear franchises across various channels. NIKE is focused on recalibrating these franchises within NIKE Digital, where they hold the largest share of business. However, these strategic actions are expected to impact certain business aspects, creating short-term revenue headwinds in fiscal 2025. In the second quarter of fiscal 2025, the company advanced its efforts to shift its product portfolio by reducing reliance on its classic footwear franchises. These franchises continued to decline at a rate faster than the overall business, with a more pronounced slowdown compared to the first quarter.
As a result, the company's second-quarter fiscal 2025 sales were impacted by ongoing headwinds from its franchise management actions, which led to year-over-year revenue declines of 8% on a reported basis and 9% on a currency-neutral basis. The company continues to see significant reductions in its classic footwear franchises through NIKE Direct, which declined 13% on a reported basis and 14% on a currency-neutral basis, including a 21% drop in NIKE Digital and a 2% decrease in NIKE Stores. Wholesale also experienced a 3% decline year over year on a reported basis and 4% decline on a currency-neutral basis. Marketplace trends in the fiscal second quarter mirrored the challenges previously highlighted, as traffic and retail sales fell short of expectations, particularly in September and October. However, November brought a positive shift, with digital and in-store traffic gaining momentum, especially during key consumer events such as Black Friday week, signaling improved performance in critical periods.
China Business in Jeopardy: NIKE's business in Greater China has been a focal point for its global strategy, reflecting significant opportunities and challenges. Recent trends reveal that the company has been experiencing considerable shifts in consumer traffic in Greater China, with declines in brick-and-mortar traffic and lower sell-through rates. Driven by retail traffic declines in a difficult macro environment, revenues in Greater China declined 11% year over year in second-quarter fiscal 2025. NIKE Direct channel revenues in Greater China declined 7%, including an 8% decline in NIKE stores and a 4% decline in NIKE Digital. Wholesale in the region was down 15% year over year. The company also required higher markdown activity to drive sell-through and inventory velocity, negatively impacting gross margins. EBIT in Greater China declined 27% on a reported basis.
Amid a competitive landscape, NIKE remains committed to delivering product innovation, inspiring consumers, and driving the growth of sports in China. The company continues to experience strong demand for full-price products, supported by reduced markdowns and higher margins on locally designed express lane offerings. While management anticipates near-term challenges, it highlights the ongoing growth of sports in China. NIKE is actively addressing current headwinds in the region to restore brand momentum and maintain a healthy marketplace.
Hedge Fund Bets
DCF
Conclusion
According to Nike's third-quarter fiscal 2025 outlook, Elliott's actions and foreign exchange headwinds will cause a low-double-digit revenue decline. The company anticipates a slight decline in SG&A expenses and a 300350 basis point drop in the gross margin year over year. Between $30 million and $40 million is the estimated range for other revenue and expenses, including net interest income. It is anticipated that the gross margin will drop 300 basis points to 41.8%, while SG&A expenses will drop 2.6% year over year to $4.1 billion. In the fiscal third quarter, SG&A expenses are anticipated to rise by 290 basis points to 36.9%.
This article first appeared on GuruFocus.
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Forbes
6 hours ago
- Forbes
Is Lululemon's Recent Pullback Your Perfect Entry Point?
CHINA - 2025/04/17: A shopper walks past the Canadian sportswear clothing band Lululemon store. ... More (Photo by Sebastian Ng/SOPA Images/LightRocket via Getty Images) Lululemon stock (NASDAQ:LULU) is currently trading at approximately $331 and seems undervalued based on its strong fundamentals, even though the stock often experiences volatility during turbulent market conditions. The company provided impressive Q1 2025 results, with revenue increasing by 7% to $2.37 billion and EPS rising to $2.60, just surpassing expectations. However, the market concentrated on a weaker-than-anticipated 1% increase in same-store sales and a revised full-year outlook, influenced in part by tariff-related pressures. The consequence? A swift 22% decline in after-hours trading that reflects more about short-term market sentiment than long-term intrinsic value. In spite of its high-performance profile, LULU behaves like a value stock. Lululemon trades at about 18x its trailing earnings (slightly lower than the historical average) and 19x price-to-free cash flow – both figures are beneath the S&P 500's averages—yet it is a company that consistently excels in revenue, margins, and return on capital. In comparison with its main competitor Nike, Lululemon is more affordable across significant profit metrics, with a reduced P/E and a more appealing P/FCF ratio. Investors are essentially acquiring Ferrari performance at Lexus pricing. Moreover, with a $32 billion market cap generating $1.6 billion in trailing free cash flow—a 5% cash flow yield, LULU appears to be more of a long-term wealth builder than a fluctuating apparel brand. For those looking for lower volatility compared to individual stocks, the Trefis High Quality portfolio offers an alternative – having outperformed the S&P 500 and yielding returns exceeding 91% since inception. Lululemon continues to showcase its growth capabilities. The company reports an impressive three-year revenue CAGR of 19%, which is more than three times the S&P 500's 5.5%. Over just the past year, it demonstrated 10% revenue growth, increasing annual sales to about $11 billion. Despite encountering macroeconomic challenges, the brand persists as a global growth powerhouse with an expanding international presence and remarkable efficiency. Its operating margin over the last four quarters of 23.7% nearly doubles the S&P 500's 13.2%, while its operating cash flow and net income margins (21.5% and 17.1%, respectively) significantly outperform broader market averages. These figures are not merely good—they're elite. Lululemon's balance sheet resembles a fortress. With a debt-to-equity ratio of just 4.9%, it is significantly below the S&P 500 average of 19.9%. Additionally, its cash-to-assets ratio of 26.1% far exceeds the market's 13.8%. This immaculate financial status provides Lululemon with both strength during downturns and the ability to invest in further growth. There's no way to sugarcoat it: Lululemon has experienced dramatic declines during market corrections. It dropped 46% during the downturn of 2022 (compared to the S&P's 25%), fell 47% in the early 2020 COVID-19 shock (versus 34%), and was extremely affected during the 2008 crash, plummeting 92% (compared to 57%). Investors must recognize that with LULU, strong fundamentals don't necessarily provide protection against sharp changes in sentiment. Our dashboard How Low Can Stocks Go During A Market Crash illustrates how major stocks performed during and after the last six market crashes. Lululemon checks nearly every box: strong growth, solid profitability, and a fortified balance sheet, with the only drawback being its susceptibility during market downturns. Trading at a slight discount relative to its strong performance profile, the recent Q1 results, which included mixed outcomes and cautious guidance, underscore immediate challenges while preserving the integrity of long-term fundamentals. Nonetheless, you could also consider the Trefis Reinforced Value (RV) Portfolio, which has surpassed its all-cap stocks benchmark (a combination of the S&P 500, S&P mid-cap, and Russell 2000 benchmark indices) to yield strong returns for investors. Why is that? The quarterly rebalanced mix of large-, mid- and small-cap RV Portfolio stocks offered a responsive strategy to capitalize on positive market conditions while limiting losses during downturns, as detailed in RV Portfolio performance metrics.
Yahoo
a day ago
- Yahoo
2 Dividend Stocks to Hold for the Next 2 Years
Dividend stocks can generate reliable passive income. The key is to find companies that have a strong track record of paying and increasing their dividends. Investors also want to be sure that they are picking companies that can generate enough earnings and free cash flow to cover and raise their dividends in the future. These 10 stocks could mint the next wave of millionaires › Since the pandemic began, the stock market has proven to be erratic, plunging at times only to quickly recover and launch into fresh bull markets. Today, with plenty of new uncertainty due to issues including President Donald Trump's trade wars, U.S. fiscal concerns, and the concerning trajectory of the U.S. economy, more volatility is certainly on the docket. That's why investors may want to check out some dividend stocks, which can provide reliable passive income. The returns of dividend stocks can be much more dependable than those of non-payers, especially if you choose ones with good track records and the ability to grow their earnings and free cash flows so they can keep regularly increasing their payouts. Here are two dividend stocks that meet those criteria that investors can feel comfortable buying and holding for the next two years. The iconic footwear and apparel company Nike (NYSE: NKE) has been less than iconic as a stock lately. It's now down by about 39% over the last five years (as of June 4). Intensifying competition in the footwear and apparel space, struggles with the brand, and an excessive focus on digital promotions and sales have resulted in the company underperforming in recent years. To change its trajectory, the board hired longtime Nike veteran Elliot Hill out of retirement to take the helm, and Nike is now deeply entrenched in his turnaround plan. Hill is focused on getting the company back to what it does best -- renewing its intense focus on the brand, leading the way on product innovation, and reactivating and improving its sales relationships with wholesalers. Hill also said earlier this year that Nike will be focused on five product areas -- running, basketball, football, training, and sportswear -- and three markets: the U.S., the United Kingdom, and China. But as some analysts have pointed out, Nike's turnaround could take longer than expected, especially if the global trade war continues or if the U.S. economy tips into a recession. A longer turnaround could make it difficult to entice investors to buy and hold the stock, which is why Nike is likely to make paying and raising its dividend a priority. Its yield of about 2.6% at the current share price isn't bad, but it trails most Treasury yields right now and over the past few years. In November, Nike increased its quarterly dividend by 8%, marking the 23rd consecutive year the company has hiked the payout. In a couple more years, Nike is likely to join an exclusive club -- the Dividend Aristocrats®, which are S&P 500 companies that have increased their payouts for a minimum of 25 straight years. (The term Dividend Aristocrats® is a registered trademark of Standard & Poor's Financial Services LLC.) Its ascension into that group will give Nike added some credibility among dividend investors. Nike also has a trailing 12-month free cash flow yield of 5.66%, more than double its current dividend yield. Nike has a good dividend track record and clear incentives to keep raising its payouts to reward shareholders for their patience. If its turnaround is successful, that should also enable the company to grow earnings and free cash flow, which will also bolster its capacity to pay higher dividends. If you've followed Wells Fargo (NYSE: WFC), then you know that the bank has been on a bumpy ride over the last decade. In 2016, it came to light that large numbers of employees at the bank had been opening banking and credit card accounts in customers' names without those customers' authorization. The scandal evolved into a reputational nightmare for Wells Fargo and cost it billions of dollars in fines and lost profits. Regulators put various restrictions and consent orders on the bank to monitor its actions. In addition, the Federal Reserve in 2018 put an asset cap on it, preventing it from growing its balance sheet above $1.95 trillion -- limiting its ability to expand, pursue acquisitions, and make more money. In 2019, the bank brought on Charlie Scharf to take over as CEO, and he did a tremendous amount of work to overhaul the bank's regulatory infrastructure and leadership team. Scharf also significantly cut expenses, sold off non-core assets, and ramped up higher-returning businesses like investment banking and credit card lending. This year, after Trump returned to the White House, banking regulators under his administration quickly terminated the consent orders that were put in place to monitor its behavior in the wake of the scandal, and just recently lifted the asset cap. That's a massive deal for the bank, which can now begin to grow its balance sheet again and go on the offensive in the financial services market. During the pandemic, Wells Fargo was one of the few banks forced to cut its dividend due to regulations put into place by the Federal Reserve. While the bank has been able to regrow its payout, its yield still sits in the bottom half of its peer group. Furthermore, broader deregulation of the banking sector from Trump and his administrators is likely on the way. I suspect the largest banks will eventually have much lower regulatory capital requirements than they have now, which will allow them to return more capital to shareholders. Furthermore, Wall Street analysts on average currently expect Wells Fargo to grow its diluted earnings per share by about 8% this year and by close to 14% next year, according to data provided by Visible Alpha. Over the last 12 months, Wells Fargo's dividends only consumed about 31% of earnings, so it should have plenty of opportunities to keep growing its payouts in the coming years. Ever feel like you missed the boat in buying the most successful stocks? Then you'll want to hear this. On rare occasions, our expert team of analysts issues a 'Double Down' stock recommendation for companies that they think are about to pop. If you're worried you've already missed your chance to invest, now is the best time to buy before it's too late. And the numbers speak for themselves: Nvidia: if you invested $1,000 when we doubled down in 2009, you'd have $363,030!* Apple: if you invested $1,000 when we doubled down in 2008, you'd have $38,088!* Netflix: if you invested $1,000 when we doubled down in 2004, you'd have $674,395!* Right now, we're issuing 'Double Down' alerts for three incredible companies, available when you join , and there may not be another chance like this anytime soon.*Stock Advisor returns as of June 2, 2025 Wells Fargo is an advertising partner of Motley Fool Money. Bram Berkowitz 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. 2 Dividend Stocks to Hold for the Next 2 Years was originally published by The Motley Fool
Forbes
a day ago
- Forbes
Target Moves Pride Merchandise Aside To Spotlight Father's Day And July 4th Holidays
Target shifted a smaller, less flamboyant collection of Pride Month merchandise back to make room for patriotic, Independence Day displays in-store and Father's Day online as other major retailers are likewise reducing emphasis on Pride displays and focusing more on other summer shopping holidays, according to CNN. Target's Pride 2025 collection is streamlined to just over 100 clothing, home, food and beverage and stationery items, all exclusively for adults, with the full collection only available online and featuring less prominent displays in some of its stores – last year only about half of Target stores had Pride displays. Target Pride merchandise is facing criticism – calls it 'pathetic' and 'confusing' – with fewer prominent rainbows on display, such as beige sandals with inconspicuous rainbow-stitching detail. Other retailers making short shrift of Pride merchandise include Macy's with an easily overlooked Pride banner way down on its home page, Walmart's home page makes no mention and Gap offers nothing overtly Pride-related online. However, Nordstrom, Abercrombie & Fitch, Hollister and Kohl's highlight Pride collections on their homepages and brands, including Levi's, Converse, Nike, Puma, Apple, Bombas, Skullcandy, Diesel, MAC cosmetics, Brooklinen, Chubbies, and Jansports, offer significant Pride Month 2025 collections. The National Retail Federation predicts Americans will spend a record $24 billion on Father's Day this year, up 7% from last year, and that nearly 90% participate in July 4th celebrations, which falls on a Friday and is likely to result in a spending boost as well. After Father's Day on June 15 has passed, will retailers lean into Pride Month promotions? Target seems to be in retreat where the LGBTQ community is concerned following Target's 2023 Pride Month displays sparked consumer backlash, calls for boycotts and in-store employee harassment, leading the company to pull Pride displays from some stores that year. As a result, Pride Month merchandise selections were scaled back in 2024 and in-store displays limited to about half of its 2,000 stores. This year, its Pride merchandise appears to be downsized even more and a similar short list of stores will feature displays. In addition, after Target ended its diversity, equity and inclusion program and stopped sharing data with the HRC Corporate Equality Index earlier this year, many diverse communities – including LGBTQ individuals – have felt abandoned by a company that was once seen a champion of minority groups. After ending 2023 down 2%, with a notable 4% comparable sales decline, and revenues basically flat in 2024, Target started 2025 with revenues off 3% and comparable sales down 4% in the first quarter. Its stock price has dropped nearly 30% this year. Numerous reasons have been given for Target's continued underperformance, but its troubles started in 2Q2023 after the Pride Month controversy when comparable sales dropped just over 5%. Before that hit, revenues rose 3% in fiscal 2022. The election of Donald Trump and his administration's strong stance against DEI programs have caused numerous corporations, like Target, to reexamine internal policies that might bring down the government's wrath. With Target facing financial pressures after having alienated more conservative customers in Pride Month 2023 and most recently, those who oppose Target's DEI reversal, it appears that Target is trying to establish itself as a 'big tent' retailer, welcoming a broad range of customers without taking ideological stances that could disenfranchise one group or another. Regrettably, it doesn't seem to be working as financial results flag and calls for boycotts continue. A new survey from the Kearney Consumer Institute, entitled 'Weighting Value with Values,' found more consumers are prioritizing the price/value equation over values-based purchasing decisions. Only about 20% of U.S. consumers believe it more important for brands to voice their values, while 80% prioritize delivering on their quality expectations. Given this 80/20 spilt, there are pitfalls for brands that get out over their skis where controversial issues are concerned, such as boycotts. Notably, a surprisingly high 39% of consumers said they have participated in a brand boycott over the past 12 months. 'You're damned if you do, damned if you don't because while many people say brands should voice their values, but then they can use that against you,' shared Katie Thomas who leads the KCI internal think tank. Right-leaning Turning Point USA contributor Morgonn McMichael praised Target in an Instagram post for showing 'more American pride' this year with its family-oriented, patriotic displays front and center in her local Target store. 'If there is anything indicating a cultural shift in our country, it's the fact that Target's Pride Collection is now this small, while Fourth of July, Independence Day is celebrated galore,' she said. Big Brands Are Pulling Back On Pride Merchandise And Events This Year (CNN, 6/5/2025) Target Swaps Out Rainbow Flags For Stars And Stripes As Shoppers Notice Shift During Pride Month (Fox Business, 6/5/2025) Target, Macy's, and Walmart Among Retailers Promoting Father's Day Over Pride Month (Washington Examiner, 6/5/2025) 12 Pride Month 2025 Collections from Brands We Can Actually Get Behind (Rollingstone, 6/4/2025)
