Consumer Products

Why Financial Worries May Be Holding Down Nike Stock

Nike Inc. (NYSE: NKE) stock has proven to be fairly resilient considering the market downturn from the coronavirus pandemic. Although Nike was hit first in China, its stock has rebounded significantly off of the March lows and the outlook is getting better.

The Dow Jones industrial average, S&P 500, and the rest of Wall Street have seen a similar bounce in this time. However, problems in the supply chain, government lockdowns, and lack of consumer demand have made it difficult for companies to fully recover. While Nike has not kept pace with the broad markets over the past month, it is better positioned than most to capitalize on a return to normalcy.

Athletic Position

Nike has boasted a strong brand portfolio and product pipeline for years now, not to mention a slew of all-star athletes in all of the major sports pushing these products. It’s no secret that Nike pays out more sponsorships and endorsements than any other athletic company on the planet.

Along with this, the Nike brand is recognized across the globe, and a host of star athletes are wearing its newest and hottest products. For those who aren’t swayed by the spotlight and the stars, or those who aren’t athletically inclined, Nike has athleisure lines for lounging.

The most recent earnings report, for the three months ended in February, revealed Nike’s strong brand and product pipeline enabled it to raise prices and increase sales of both apparel and footwear. Some analysts also believe that retailers seeking to boost weak sales during this time are turning to Nike to raise customer traffic, increasing Nike’s bargaining power as a supplier.

Under Armour and Adidas have proved to be some competition to Nike, but these companies are really playing Isiah Thomas to Nike’s Michael Jordan. Even though the industry remains fiercely competitive, a company like Nike will only build on its superior position through its globally recognized brand, innovative products, economies of scale and rapid growth in emerging markets.

Considering this, Nike is in a favorable position in the long term, or at least playing the long game. While there have been near-term disruptions, Nike’s e-commerce team has picked up some of the slack.

E-Commerce: The Next Step

The coronavirus fundamentally changed the way that many companies are doing business. One key shift that many companies are making is towards e-commerce and building out their omnichannel platforms.

With the new stay-at-home rules people will naturally get used to the idea of purchasing more stuff online, and once the convenience of that sinks in, there is a good chance that traditional brick-and-mortar retailers will be even more battered than they are now. Nike has taken a similar approach, but luckily the company had already built out its platform. Nike has relied heavily on e-commerce sales during this time.

Beginning on March 16, Nike shut down, or temporarily closed, all its U.S. and many international stores to help stop the spread of coronavirus. All Nike stores in China had been closed earlier, as were those in Japan and South Korea. By the time the company reported results on March 24, about 80% of 7,000 Chinese stores that sell Nike gear had reopened. Nike also reopened one of its stores in Wuhan, the city where the outbreak first emerged.

During the store closures, Nike did not waste any time and immediately pushed digital sales to Chinese consumers stuck in their homes. The result was a big increase in digital sales that remained strong even after the stores reopened.

Overall the strategy paid off and Nike’s management noted that this experience in Asia could give the company a blueprint for how to deal with the social distancing and stay-at-home rules that were later introduced in the United States. Consumers don’t seem to be ready to make their return to malls and shops in person yet, but Nike thinks it will be ready when shoppers return.

Nike’s stores and digital sales combined are expected to post double-digit gains over the next few years. It’s worth pointing out here that the digital sales are expanding from a fairly small base. For this reason, it’s possible to see massive growth for at least a few years.

Financial vs. Fundamental

Nike has proven to be an incredible company in terms of its functionality, supply chain, and product portfolio, but on paper it might not appear that great, at least right now. At first glance some of the financials might not look good. And this could be what’s holding investors back from fully buying in to Nike’s recovery.

Again, Nike shares are only up about 10% in the past month and this is not keeping pace with the broad markets, but there’s more to this story. Nike’s stock price has bounced back but not enough. In fact it ranks in the dead center of the DJIA in terms of its performance in this time.

Currently, Nike’s price-to-earnings (P/E) ratio (32.3) ranks the fourth most expensive in the Dow and its forward P/E ratio (31.9) ranks second most expensive. Nike’s price-to-free-cash-flow also ranks second in the Dow at 68.8.

It’s worth pointing out that investors use these financial metrics to compare different companies and different industries–meaning that these numbers are relative. Although the numbers might hold Nike back on paper, it’s hard to make a case against this athletic juggernaut on a fundamental basis.