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Nike has become more of a fashion company over the past decade. Its Sportswear business accounted for around 25% of revenue in FY15 and around 50% in FY25, making it the main growth driver over that period. The company deviated from its roots in performance footwear and increasingly relied on retro designs. This made the business more dependent on trends.
During COVID, Nike also pivoted heavily toward DTC, mainly selling through its own website and stores. Consumers eventually returned to wholesale, but by then Nike had already given up significant retail space to competitors, which filled the vacuum after Nike reduced its wholesale presence.
The new strategy is basically about refocusing the organization on performance: faster innovation cycles, less reliance on Sportswear, and more promotion through athletes. Management has also changed the organizational structure and now develops products through vertically integrated teams focused on different sports, such as running, basketball, golf, etc. At the same time, Nike is increasing its presence in wholesale again.
I still think Nike is part of American pop culture and is unlikely to become obsolete, especially with these strategic changes. I rate it as a Hold, though. The strategic missteps and stronger competition make me less confident that Nike will return to its previous strength. I think a more realistic outcome could simply be a recovery and stabilization of the business.
Hoka and On are serious competitors, and digital marketing has definitely made it easier for smaller brands to compete with the big players. I was actually surprised by how present some of these brands have become in retail.
My biggest concern is the valuation. On an adjusted basis, I estimate Nike is trading at around 21x earnings, after deducting the positive impact from the tariff refund and adding back the one-time severance and restructuring costs. For an uncertain turnaround, I don't think that provides enough margin of safety. The stock is also trading at around 27x P/FCF.
In my bull case, the expected return, including dividends, is 17.5%, while in my bear case it is only 8%. I would need at least an 11% expected return in my bear case to have a sufficient margin of safety, which implies a share price of around $35.
So I would consider Nike a Cautious Buy below $35, but I wouldn't make it a position larger than 5%. If it never gets there, that's fine with me.
I also wrote a full article on Nike for Seeking Alpha if you're interested. Feel free to check it out.
What is your view on Nike?