Sneaker giant Nike (NKE) has lost investors a lot of money. The stock has fallen 19% year-to-date due to flat growth and rising competition from several upstarts. While some stock declines present buying opportunities for investors, I fear that Nike’s share price is likely to decrease further. As such, I’m bearish on NKE stock.
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The Verdict is Out on Nike’s Leadership Change
I remain bearish on Nike despite the recently announced leadership change at the company. Nike’s embattled CEO John Donahoe has announced that he will retire from the company in October of this year and be succeeded in the top job by company insider Elliott Hill. News of Donahoe’s departure sent NKE stock up 7% in a single trading day.
However, new management alone is not likely to revive Nike’s fortunes. The company still has a lot to prove as it loses market share to rivals such as Deckers Outdoor (DECK) and On Holding (ONON). Nike’s sales have been flat for several years, including a 2% year-over-year drop in its most recent quarter. The company needs to reignite growth if it wants to win back the confidence of investors.
While the leadership change has revived interest in NKE stock, investors shouldn’t rush to join the party. There are other athletic apparel makers that are growing at faster rates and whose stock is also cheap. Lululemon Athletica (LULU), for example, has a lower price-to-earnings (P/E) ratio than Nike and that company delivered 7% year-over-year revenue growth in its most recent quarter.
Nike’s Stagnant Growth
Another reason I am bearish on Nike is that slow revenue growth is limiting the company’s ability to increase profits. While Nike reported 45% year-over-year net income growth in its latest quarter, that growth rate won’t last if sales growth remains in the low single digits.
NKE stock currently trades at 23 times future earnings estimates. That’s a richer valuation that Lululemon’s stock at 20 times future earnings estimates, and Skechers (SKX), whose stock trades at a P/E ratio of 17. Both Lululemon and Skechers have higher revenue growth than Nike.
Looking at the dividend, Nike has maintained an annualized 12% growth rate in its shareholder distribution over the past 10 years. However, the dividend was raised by only 8.8% in 2023 owing to the company’s financial problems. It would be concerning to see the dividend growth rate fall below 8%. Nike will next announce its dividend in November of this year.
Competitors Gain Ground on NKE
The changing competitive landscape in the athletic apparel industry is another reason I’m bearish on NKE stock. It’s not just that Nike has had bad leadership in recent years. It’s that the company has lost market share to several fast-growing rivals.
Deckers Outdoor (DECK) is a rising threat to Nike, having reported 22% year-over-year revenue growth and 82% year-over-year net income growth in its most recent quarter. Deckers Outdoor makes popular shoe brands such as HOKA runners and UGG boots.
Moving forward, Nike must compete with more nimble, faster-growing companies that are targeting the same customer base. HOKA sneakers have only been around since 2009 but are proving to be extremely popular with professional and amateur runners alike. Each new competitor that attracts consumers makes the uphill battle more challenging for Nike.
Is Nike Stock a Buy or Sell?
Nike’s stock is rated a Moderate Buy among 33 Wall Street analysts. That’s based on 15 Buy, 18 Hold, and no Sell ratings issued in the last three months. The average price target on NKE stock of $92.80 implies 7.76% upside potential from current levels.
Read more analyst ratings on NKE stock
Conclusion
Poor management and bad execution have hurt Nike’s share price in recent years. Growth has slowed to a crawl and the company has lost market share. While Nike remains the world’s leading athletic apparel company, it faces a long road to recovery under a new CEO. With future prospects uncertain at this time, I remain bearish on the outlook for NKE stock.
