Shares of popular athletic apparel maker Nike (NKE) are on the verge of surrendering their pandemic gains, shedding another 5.6% on Thursday. The stock has been incredibly resilient in the face of economic storm clouds. Still, the stock now finds itself down around 40% from peak to trough. Despite the severity of the decline, Nike stock is still not yet cheap, especially when you factor in the increased odds of a consumer recession.
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For Nike, it’s mostly been about challenges on the supply side, most notably supply disruptions caused by COVID-19. Thus far, demand has been robust. In the latest quarter, Nike fared well in spite of delays and disruptions. Whether demand for activewear remains once the supply chain is fully in order is a major question mark.
With the odds of a recession creeping higher with every Federal Reserve rate hike, Nike could see demand begin to slip. Undoubtedly, discretionary items tend to be one of the first to be axed from the budget when times get tough.
In the Chinese market, demand had cooled off in a big way, with yet another quarter of year-over-year sales declines. Most of the demand decline was related to strict COVID-19 restrictions. However, one must not discount the weakening economy’s impact on consumer spending.
For now, Nike is doing almost everything right. Management expects supply-chain issues are going away alongside its margin-eroding impact. Just because the supply side is getting back in order doesn’t mean demand will stick around.
As more evidence of a consumer recession grows, Nike stock could be at risk of adding to its losses. The 28.3 times trailing earnings multiple is still quite hot, given the circumstances. Given headwinds and the rich multiple, I am inclined to stay neutral on the stock.
On TipRanks, NKE scores a 9 out of 10 on the Smart Score spectrum. This indicates a high potential for the stock to outperform the broader market.
Can the Brand Bounce Back in a Recession?
Nike is a force to be reckoned with in footwear and sports apparel. Still, a strong brand does not make the firm’s products a “must-have” as opposed to a “nice-to-have.” In times of economic turmoil, “must-haves” are the haves and the “nice-to-haves” tend to be the have-nots.
Looking ahead, things are quite gloomy in the Americas. That said, the Chinese market may be a source of relief, as the economy bounces back from COVID-19 lockdowns.
China is a major growth market for Nike, and it will be for quite some time. With subtle signs of a recovery in China, Nike may very well have some relief as the American economy gradually fades at the hand of rate hikes.
Even as demand in the states retreats, Nike is ready to continue investing in its business, with the e-commerce platform and various other intriguing initiatives that could help Nike rise out of the next recession in an even stronger position. At the end of the day, that’s really all you can ask out of a company.
Nike’s direct-to-consumer (DTC) strength has been remarkable over the years. As the company continues betting big on e-commerce, more sales are likely to continue going digital, providing Nike with a lot of upward pressure on margins.
If anything, a consumer recession will act as more of a road bump for a firm like Nike than a crisis that derails the company’s robust fundamentals. For now, it will be interesting to see how Nike fares as Chinese consumers look to get a boost.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, NKE stock comes in as a Moderate Buy. Out of 23 analyst ratings, there are 17 Buy recommendations and six Hold recommendations.
The average Nike price target is $155.50, implying an upside of 44.88%. Analyst price targets range from a low of $106.00 per share to a high of $185.00 per share.
The Bottom Line on Nike Stock
Nike stock has a legendary brand with a wide moat surrounding it. Management may be exceptional operators, but I can’t say I’m a huge fan of recent share repurchases. In the fiscal third quarter, Nike bought back $1.2 billion worth of its own stock.
Such share repurchases are only a good thing if a firm buys back at cheap prices. Arguably, the stock remains lofty in the face of a recession, leaving a lot of room for downside as this market continues to punish discretionary firms with elevated price-to-earnings (P/E) multiples.
