This is not a question many on Wall Street would have asked themselves last year, because Nike †NYSE: NKE) spent most of the fourth quarter reaching all-time highs. But now that we’re on our way to what’s going to be a stormy summer, you can bet it’s being asked now. Shares of the sportswear titan are down more than 40% from their fourth quarter high, and their lowest since August 2020. Indeed, this is the same price they switched hands before any of us had ever heard of COVID. .
So what exactly is the outlook?and is there a case for a stock reversal in the medium term?
Their Q4 fiscal numbers, released earlier this week, offer some answers. While both sales and earnings per share came in ahead of expectations, the former declined slightly year-on-year. The stock’s subsequent fall of 7% during yesterday’s session sums up Wall Street’s response to the latest report. That said, Nike still tried hard to strike a bullish tone and focus on the positives. Commenting on the results, John Donahoe, President and CEO, said, “Nike’s results this fiscal year are testament to the unparalleled strength of our brands and our deep connection with consumers. Our Competitive Advantages:including our pipeline of innovative products and growing digital leadership, prove our strategy works as we create value through our relentless drive to serve the future of sport.”
Headwinds in the short term
It may be difficult for some of us to see exactly where this unparalleled strength and competitive advantage is helping the stock’s performance, but as Seaport Research Partners noted last week, Nike is “down just 39% from their 52-week highs, versus the 46% that their average peer is lower.” This comment came as part of the company’s downgrade to Nike stock. They moved them to a neutral position and took a cautious stance on the medium term outlook†
Analyst Mitch Kummetz wrote that “there is a mismatch between sentiment and reality and the sentiment isn’t exactly great,” but the company is technically still outperform their peers† He went on to explain that while the rest of the retail sector is rumbling, Nike’s resilience is a trend that defies all logic. For those of us starting to think this might justify dipping a toe in the water, Kummetz urges caution. Nike’s P/E ratio is still about 23x even after the months of selling, and this is about double that of its peer group. Given that rising inflation and supply chain risks, as well as the slowdown in spending across China will affect Nike just as much, if not more than its peer group, that premium is hard to justify in his view.
Consider a position
Lorraine Hutchinson of Bank of America took a similar stance when she reiterated her Neutral rating last week. “A tumultuous environment in China and a faltering US/EMEA macro picture balance between the positives in the long term of increased innovation and the margin benefits of a shift to DTC,” she wrote in a note to customers. And this might sum up the situation for any retail investor thinking about a new feature† Nike isn’t going anywhere in the long run but is dealing with more than its fair share of short-term fundamental headwinds forcing stocks to go through some pretty brutal revaluation.
There is no doubt that they are in a well-defined downtrend setting lower lows, but they should run into some pretty stubborn support around $98 soon. If they can spend some time consolidating there and if there are signs that this headwind could disappear by the end of 2022, there may not be much better purchases than Nike in the second half of 2022. It’s certainly a higher risk stock right now, but it’s hard to imagine a position not going to be a winner in the long run.