Buy Nike (NKE) Stock When Investor Fear Returns

You are undoubtedly familiar with Nike (NKE) and the stock to some extent and possibly wear its products! Look at what people wear when exercising and you will likely see the NIKE ‘Swoosh’. This logo is recognizable almost globally except perhaps in remote regions of the world.

I have become fascinated with the world of sports apparel and in particular, running shoes. It amazes me how the industry has evolved over the last few decades. When I played tennis as a youngster in the 1970s, Adidas Rod Laver and Adidas Stan Smith were popular. I also remember a host of other Adidas models, and the Tiger, Converse, and Puma brands.

Athletic shoes in those days were primitive. Now we have super high-tech shoes that are subject to debate:

Some are happy about the new technology, arguing that an influx of world records and fast times only serves to advance the sport; others, like long-time coach Peter Thompson, believe that they are an obfuscation, skewing performance and removing a sense of “natural progression” in distance running.

CNN: Super shoes have ‘blown distance running into a new stratosphere.’ Are they benefitting the sport?

Whether you agree with long-time coach Peter Thompson or not, the business of sports apparel including running shoes is BIG business. In NKE’s FY2023, it generated revenue in excess of $51B. Add in the revenue from all NKE competitors and we’re looking at total annual revenue in the hundreds of billions of dollars.

Read Shoe Dog – Phil Knight – A Memoir By The Creator of Nike and try to imagine NKE before the creation of the ‘Swoosh’.

Imagine being the graphic design student who created the iconic “Swoosh” logo in 1971. She was paid $35 which got her a start in the design world. She became known as the ‘Logo Lady’ and landed considerably more business. In addition, NKE president Bob Woodell and NKE co-founder Phil Knight gave her a gold ring in the shape of a swoosh with a diamond in it and some NKE shares in 1983.

I don’t know how many shares she received but if we look at NKE’s investment calculator (the calculator only goes back to the beginning of 1995), we see that $10,000 invested in NKE in early January 1995 is currently valued in excess of $500,000.

I also encourage you to watch Air – A Story of Greatness which currently airs on Amazon Prime at the time I compose this post. It is interesting to see how NKE and not Adidas or Converse landed Michael Jordan. Spoiler Alert: Michael Jordan’s mother drove a hard bargain!

Business Overview

The best source from which to learn about Nike stock is Part 1 Item 1- Business in the FY2023 Form 10-K. In this section, we get a general overview of the company, its products, and markets amongst other pertinent information.

Learning about a company also entails an understanding of risk factors that may currently exist or which could materialize. Item 1A – Risk Factors in the Form 10-K runs from page 12 to page 26!

CEO and NEO Compensation

As retail investors, we may have some concerns about a company’s CEO and Named Executive Officers (NEO) compensation. We, however, typically have insufficient share ownership to influence their compensation structure. It is, therefore, important that we determine if the CEO and NEO compensation structure aligns with our long-term shareholder interests. If the long-term incentive component makes up a large percentage of the CEO’s and NEOs’ compensation structures, I envision they will make decisions that align with my interests.

I look at a company’s Proxy Statement to determine the degree to which ‘pay for performance’ impacts executive compensation; the section on Executive Compensation in NKE’s 2023 Proxy Statement is extensive.

In order to drive business results and maximize shareholder value, NKE’s executive compensation is highly incentive-based and weighted toward long-term awards to emphasize long-term performance and support retention. The executive compensation program includes the use of stock-based compensation consisting of Performance-based Restricted Stock Units (PSUs), Stock
Options, and Time-Vesting Restricted Stock Units (RSUs); this applies not only to the CEO but also to the NEOs.

The following chart illustrates the mix of components that make up the FY2023 target total annual direct compensation for NKE’s CEO.

We see from this chart that 93% of the CEO’s compensation is directly tied to how NKE performs relative to targets.

Based on my review of their compensation structures, I am satisfied that NKE’s Executive Compensation is aligned with my shareholder interests.

Financials

Q1 2024 Results

Nike stock’s most recent results are accessible in this Earnings Release and the in Q1 2024 Form 10-Q.

NKE’s inventory metric is closely monitored following an inventory glut that has plagued it for the last several quarters. Analysts had anticipated inventories of $8.84B but NKE reported ~$8.7B versus ~$9.66B in Q1 2023.

Direct-to-consumer sales, a closely watched growth metric, increased to $5.4B, a ~6% increase from Q1 2023.

Revenue in Greater China has been a key concern since Nike stock has significant exposure to China and there are geopolitical risks and reports of slower economic growth in the Chinese economy.

Looking at the chart below, we see that Nike generated $1.735B of revenue from the Greater China market versus $1.656B in Q1 2023.

On the Q1 earnings call, NKE’s CEO mentioned:

Sport is back in China, you can just feel it. That gives us great confidence about the future and the Chinese consumer in our segment regardless of the macroeconomic outlook there.

Source: John Donahoe, NKE CEO, Q1 2024 Earnings Call – September 28, 2023

Another area of concern is Foot Locker’s warning a few months ago of a slowdown in its footwear business due to ‘price-sensitive’ consumers. About 64% of Foot Locker’s sales are the NKE brand. If Foot Locker struggles to offload NKE inventory, it is reasonable to question the impact on NKE’s wholesale market. On the Q1 earnings call, however, management highlighted that no retail partner represents more than a ‘mid-single’ digit portion of NKE’s overall sales.

Management also stated on the earnings call that:

Working capital efficiency is improving with a normalized supply chain. Gross margins are expanding on an operational basis, excluding the effects of foreign exchange, and transitory headwinds are abating.

Source: Matthew Friend, NKE EVP and CFO, Q1 2024 Earnings Call – September 28, 2023

Free Cash Flow (FCF)

Nike is highly profitable and repeatedly generates strong Free Cash Flow ($1.261B, $2.434B, $2.133B, $3.717B, $2.256B, $2.741B, $3.927B, $4.784B, $1.399B, $5.962B, $4.43B, and $4.872B in FY2012 – FY2023).

In Q1 2024, Nike’s Cash used by operations was $66 million. Additions to property, plant and equipment amounted to $253 million. This results in a Q1 FCF deficit of $319 million.

Investors should not read too much into this deficit. Nike stock has 3 more quarters in FY2024 in which to generate an FCF level that is comparable with historical levels.

FY2024 Guidance

NKE continues to expect reported revenue to grow mid-single digits in FY2024.

Expectations are for 140 – 160 basis points (bps) gross margin expansion. This includes 50 bps of negative impact from foreign exchange headwinds.

Selling, general and administrative expenses (SG&A) are expected to be at the high end of mid-single digits which will outpace revenue growth.

The forecast for other income and expenses, including net interest income, remains at ~$0.225B – $0.275B.

Management continues to expect the effective tax rate to be in the high-teens range.

In Q2, reported revenue growth is expected to be up slightly versus Q2 2023 as Nike stock faces its most challenging comparisons from FY2023.

The gross margin in Q2 is expected to expand by ~100 bps versus the prior year. This increase reflects the benefits of strategic pricing, improved markdowns, and lower ocean freight rates, partially offset by higher product input costs.

Credit Ratings

In Q1, NKE reported $8.929B of long-term debt in its Form 10-Q. This amount is almost identical to the long-term debt owed at NKE’s May 31, 2023 fiscal year end (see long-term debt schedule below).

We see from this schedule that NKE is borrowing at VERY attractive rates. Furthermore, the scheduled maturity suggests that NKE should easily be able to retire its obligations.

Moody’s assigns an A1 rating while S&P Global assigns an AA- rating to NKE’s domestic senior unsecured long-term debt.

Moody’s rating is the top tier of the ‘upper-medium grade’ investment-grade category. S&P Global’s rating is one notch higher at the bottom tier of the high-grade investment-grade category.

Moody’s rating defines Nike as having a STRONG capacity to meet its financial commitments. It is, however, somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.

S&P’s rating defines NikeE as having a VERY STRONG capacity to meet its financial commitments with its rating differing from the highest-rated obligors only to a small degree.

Dividends, Share Repurchases, and Stock Splits

Dividend and Dividend Yield

On August 3, NKE announced that its Board declared a $0.34/share dividend on the outstanding Class A and Class B Common Stock payable on October 2, 2023, to shareholders of record at the close of business on September 5, 2023; this marked the 4th consecutive quarterly dividend at this level.

NKE has historically announced a dividend increase in mid-November. The record date is generally within the first week of December and the distribution date is generally at the end of December or the very beginning of January.

When I wrote my July 2021 review at Financial Freedom Is A Journey, Nike stock’s $1.10 annual dividend yielded ~0.68% based on the current ~$162 share price.

At the time of my March 22, 2022 post, Nike stock’s share price was ~$133. Based on NKE’s $0.305 quarterly dividend, the dividend yield was ~0.9%.

When I wrote my July 5, 2022 post, shares traded at ~$101. Based on the current $0.305 quarterly dividend, the dividend yield was ~1.2%.

On November 15, 2022, NKE declared a $0.34 quarterly dividend and on July 5, 2023, it distributed its 3rd quarterly dividend at this level. Using the current ~$104.50 share price, the dividend yield was ~1.3%.

Dividend Growth

Looking at NKE’s recent dividend increases, it is not unreasonable to envision a ~$0.03 increase in mid-November. If this materializes, the next 4 quarterly dividends will amount to ~$1.48 ($0.37 x 4). Using the current ~$107 share price, the forward dividend yield would be ~1.38%. The projected dividend yield based on my September 27 ~$90 purchase price, however, is ~1.64%.

While NKE has increased its dividends for 22 consecutive years, making it a Dividend Contender. However, dividend metrics are of little relevance in my investment decision-making process. My interest lies in an investment’s TOTAL potential shareholder return. I would much rather a company retain funds or repurchase attractively valued outstanding shares if these methods of capital allocation will generate superior returns than what could be attained from dividend distributions.

Share Repurchases

NKE has been a prolific buyer of its issued and outstanding shares.

Throughout FY2023, NKE repurchased 50 million shares for $5.5B. Of this total, 6.5 million shares were repurchased for $0.7B under the previous four-year, $15B program approved by the Board in June 2018. The remaining 43.5 million shares repurchased for $4.8B were retired under the current four-year, $18B program approved by the Board in June 2022.

In Q1 2024, NKE repurchased $1.1B, reflecting 10.5 million shares retired as part of the current share repurchase program.

As of August 31, 2023, NKE had repurchased 54 million shares under the program for a total of ~$5.9B.

The weighted average number of outstanding shares in FY2011 – 2023 (in millions rounded) is 1,943, 1,879, 1,833, 1,812, 1,769, 1,743, 1,692, 1,659, 1,618, 1,592, 1,609, 1,611, and 1,570. The diluted weighted average common shares outstanding in Q1 2024 have been further reduced to ~1,543!

Valuation

NKE’s FY2012 – FY2023 diluted PE is 21.86, 26.75, 28.62, 30.34, 22.39, 27.08, 55.74, 35.42, 79.93, 43.75, 33.05, and 27.92.

In my September 29 Nike Exposure Increased post at Financial Freedom Is A Journey, I disclosed my September 27 purchase of an additional 100 Nike (NKE) shares @ ~$90/share in a ‘Core’ account within the FFJ Portfolio. Using this purchase price and the adjusted diluted earnings broker estimates, NKE’s forward adjusted diluted PE levels were:

• FY2024 – 35 brokers – ~24.3 using a mean of $3.71 and low/high of $3.50 – $3.89.
• FY2025 – 34 brokers – ~20.7 using a mean of $4.35 and low/high of $3.81 – $4.82.
• FY2026 – 16 brokers – ~17.9 using a mean of $5.03 and low/high of $4.29 – $5.80.

NKE’s share price has surged to ~$107 as I compose this post. Broker estimates, however, are very similar to when I purchased my shares

• FY2024 – 31 brokers – ~28.8 using a mean of $3.72 and low/high of $3.50 – $3.89.
• FY2025 – 31 brokers – ~24.7 using a mean of $4.34 and low/high of $3.78 – $4.82.
• FY2026 – 13 brokers – ~21.4 using a mean of $4.99 and low/high of $4.26 – $5.80.

Nothing has fundamentally changed from when I paid ~$90/share on September 27. The share price, however, has risen $17! We have gone from ‘undervalued’ at the end of September to fairly valued as I compose this post.

Buy Nike Stock When Investor Fear Returns – Final Thoughts

Consumers in various global economies are feeling the effects of higher inflation and the higher interest rates central banks have been using to combat higher inflation. It remains to be seen the extent to which this will impact consumer purchases of NKE products. I suspect people who are struggling with ‘more month than money’ will find that the purchase of new NKE apparel is not a top priority.

Long-term investors, however, recognize that business is cyclical. Ebbs and flows are normal and there will be periods when headwinds lead to a moderation in growth. NKE, however, is a leader in the athletic apparel market. It has an intangible brand asset and can charge a premium for its products. Despite stiff competition from other well-established brands (eg. Adidas, Puma, Reebok, Brooks, Asics, Saucony, Altra) and up-and-comers such as On (founded in 2010) and Hoka (founded in 2009), I think NKE can maintain its market-leading position.

I am continually amazed when investors cheer for days when the broad market rockets higher. If we’re looking to create long-term wealth, doesn’t it make more sense to buy when companies go ‘on sale’?

As much as I like NKE as a long-term investment, I TRY to acquire shares in great companies when they encounter a ‘speed bump’ and many investors are ‘heading for the exits’.

After a recent brief period where the share price of so many companies hit a new 52-week low, craziness has returned. Looking at NKE’s current valuation, I am hesitant to add to my exposure and will bide my time.

Author Disclosure: I am long NKE. I disclose holdings held in the FFJ Portfolio and the dividend income generated from the holdings within this portfolio. I do not disclose details of holdings held in various tax-advantaged accounts for confidentiality reasons.

Author Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.

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