Nike(NYSE: NKE) reported second-quarter fiscal 2025 results on Dec. 19, beating revenue and bottom-line estimates (although expectations were very low). However, the stock fell slightly on December 20 despite a 1.1% gain in the S&P 500 as investors assimilated Nike’s forecasts and the timeline for its recovery.
The company has increased its dividend for 23 consecutive years and currently yields 2.1%, making it an intriguing choice for passive income investors who believe in its turnaround story. Here’s what you need to know about Nike and whether it’s worth buying a dividend stock now.
Image source: Getty Images.
Nike stock has risen just under 20% over the past nine years despite a tremendous 196% gain in the S&P 500. The stock briefly hit an all-time high in 2021, but it was an overreaction to surges in the COVID-induced spending. .
The company has encountered several challenges, the biggest being its distribution model. In 2017, it decided to grow its direct-to-consumer (DTC) business under the Nike Direct label to become less dependent on wholesalers, who act as middlemen between consumers and Nike.
The strategy had the potential to increase Nike’s margins, establish direct relationships with consumers, and improve the effectiveness of its promotions. A company can better personalize its marketing efforts if it has more information about buyer behavior and preferences. Think about the “you might also like” message on a streaming service or online shopping website.
In addition to expanding DTC through Nike Direct, the company also wanted to grow its apparel business to become less reliant on footwear. Finally, Nike gave a big boost internationally, specifically in China.
In retrospect, none of these ideas were particularly bad, they simply left the company overexpanded and vulnerable to downturns. Nike Direct has been doing quite well, but it has hurt the company’s wholesale business. China has been through a recession for many companies, not just Nike.
The company faces increasingly strong competition from Lululemon Athletica and others on the clothing side, and Outdoor Deckers-owned by Hoka and waiting mainly in the field of footwear (although these brands also offer clothing). These native DTC companies do not have the legacy dependence on wholesale, making them arguably more flexible than Nike.
In the latest quarter, sales declined across all geographies, in footwear and apparel, and in both Nike Direct and wholesale. So the whole business is doing poorly. Orientation provided no respite. Management forecasts a weak second half of its fiscal year as it cuts product prices to reduce inventory and strengthen its product portfolio.
Its new CEO, Elliott Hill, has said he expects Nike to “win again” by focusing more on its footwear roots. Meanwhile, margins are likely to take a huge hit due to reduced inventory.
The main takeaway from the latest quarter and the commentary on the earnings call was that the company’s recovery will take longer than expected and its near-term results will be weak. There is also the possibility that the recovery could be delayed further if interest rates remain high for longer.
The Federal Reserve’s Dec. 18 commentary indicated it could slow the pace of interest rate cuts, which could limit consumer spending on discretionary goods. If the new administration moves forward with the tariffs, Nike’s margins could be further squeezed.
NKE data by YCharts; TTM = last 12 months.
As you can see from the chart, Nike’s sales are falling from record levels and its operating margins are at their lowest levels in the last decade (if you exclude the brief pandemic-induced decline). In short, Nike is already in a vulnerable place and is not well positioned to handle these potential challenges.
The stock is probably worth buying, but only if you’re willing to hold it for at least five years. The short-term risks and potential rewards don’t look good, as many things have to go right for Nike to show improvements, while external factors like higher interest rates and tariffs could compound its problems.
However, there is no denying that the more stocks fall, the more attractive they become to long-term investors. Nike doesn’t look so cheap now because its earnings are expected to decline in the near term. However, it could start to look very cheap once you get past your inventory reductions. Years from now, it wouldn’t be surprising to see Nike succeed after the turnaround, especially if China recovers.
The dividend is an incentive to hold the stock during this period. A 2.1% yield is higher than the S&P 500 average of 1.2%. It’s also worth mentioning that while Nike’s business hasn’t performed as well, it has managed to increase the dividend by a considerable amount in the last few years.
The last five annual increases were 8%, 9%, 11%, 11% and 12%. I would expect future increases to be in the high single digit percentages. But still, Nike has gone from a historically growth-focused company to a viable passive income strategy.
In short, investors who trust the brand and don’t mind waiting for a turnaround might consider buying the stock now and sitting back collecting passive income. But skeptical people may want to keep Nike on a watch list and see how the company responds to potential challenges.
Have you ever felt like you missed the boat when buying the hottest stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double bet” actions recommendation for companies that believe they are about to explode. If you’re worried you’ve missed an opportunity to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
NVIDIA:If you invested $1,000 when we doubled down in 2009,you would have $362,166!*
Apple: If you invested $1,000 when we doubled down in 2008, you would have $48,344!*
netflix: If you invested $1,000 when we doubled down in 2004, you would have $491,537!*
Right now, we are issuing “double bet” alerts for three incredible companies and there may not be another opportunity like this anytime soon.
See 3 “double bet” actions »
*Stock Advisor returns from December 23, 2024
Daniel Foelber has positions in Nike and has the following options: Long $70 January 2025 calls on Nike. The Motley Fool has positions and recommends Deckers Outdoor, Lululemon Athletica and Nike. The Motley Fool recommends On Holding. The Motley Fool has a disclosure policy.
Nike’s turnaround is underway, but will the dividend growth stock be buyable before 2025? was originally published by The Motley Fool
