A fresh look at Nike
Shares of apparel and footwear giant Nike (NKE) tumbled as much as 17% this morning after reporting disappointing earnings after market close yesterday.
A hat tip to my friend David Berman of Durban Capital who, in his presentation at the Stansberry Research Conference & Alliance Meeting in October, warned about Nike and Lululemon Athletica (LULU). Both stocks have had substantial drops since then.
I wrote about Nike in 2024 on August 9 and August 12, and my team and I ended up recommending it in Stansberry's Investment Advisory in the September 2024 issue.
We were too early and stopped out of the position a year ago for a 28% loss. This is a good example of how stop losses can really work, as the stock is down another 20% since then.
And it's now at levels not seen in around a decade, as this 20-year chart shows:
Could today be a final leg down in the stock, creating a buying opportunity?
To answer that, let's take a look at Nike's earnings report, long-term financials, and valuation...
Revenue was flat year over year ("YOY") and down 3% on a currency-adjusted basis. Earnings per share ("EPS") came in at $0.35, down 35% YOY. But both results were above expectations, so those weren't the main issue.
It's the outlook that triggered the stock's sell-off. Investors were hoping for a quick turnaround, but were disappointed by management's guidance.
During the conference call, management said next quarter's revenue would be 2% to 4% below the same quarter last year and that it would remain down low single digits for the rest of the calendar year – below expectations of a low-single-digit increase. (You can see this information on pages 13 and 14 of the call transcript here.)
Not only that, but management's commentary was tepid. CEO Elliott Hill said, "The work is not finished, but the direction is clear. Our teams are moving with focus and urgency, and our foundation is getting even stronger to build the future of Nike."
And Chief Financial Officer Matthew Friend added, "We remain confident in our ability to position the company for profitable growth long term."
But during the conference call, Friend confessed that "our comeback is taking longer than we would like" and added, "Over these next nine months, there will continue to be puts and takes across the revenue and gross margin lines of our business."
My translation: "Our business is more broken than we thought, so it's going to take at least the rest of this year before we start seeing YOY improvements."
Analysts are scrambling to distance themselves from the stock that they were recommending at almost double today's price. Here's an example in this CNBC article:
"We thought improved performance product innovation and lapping Win Now actions would result in a return to growth in 1Q27; instead, management has initiated guidance for sales to remain negative into 3Q27," Bank of America analyst Lorraine Hutchinson said Wednesday in a note to clients. "Strong results in running and NA were the reasons for our patience but with the sales inflection now nine months away, we see little room for multiple expansion, leading to our downgrade to Neutral."
Bank of America downgraded Nike to neutral from buy. It has also lowered its price target on shares to $55 from $73...
Now let's take a look at Nike's long-term historical financials...
After years of steady growth, capped by a huge pandemic-driven boom, revenue has declined modestly the past two years. Meanwhile, profitability has plummeted, as you can see in the chart below:
(Note that Nike's 2026 fiscal year ends on May 31, so the just-reported quarter – fiscal third-quarter 2026 – ended on February 28.)
Free cash flow ("FCF") has followed a similar trajectory, as the chart below shows:
(Note that Nike didn't release a cash-flow statement as part of its most recent earnings release. So the numbers above are only through the end of November – fiscal second-quarter 2026 – not February.)
Nike has used its robust FCF to pay a steadily rising dividend, which yields 3.6% at today's price, and repurchase shares (though this has slowed to a trickle recently):
As a result of the $50 billion in share repurchases over the past two decades, diluted shares outstanding have declined by 27.5%, equal to 1.6% compounded annually:
In nine of the past 11 years, Nike has returned more cash to shareholders than it has generated in FCF.
As a result, the company's balance sheet has gone from nearly $5 billion of net cash to just over $3 billion of net debt (though this is a very low number in light of Nike's size and cash flows):
In summary, Nike's financials have weakened considerably in the past two years. But FCF remains strongly positive, and its balance sheet is healthy. This is what I like to see when investing in turnarounds.
But what about the valuation? At this morning's price around $45.50 per share, the company has a market cap of $67.4 billion. Adding $3.1 billion of net debt, its enterprise value is $70.5 billion.
Nike earned $2.16 per share in its 2025 fiscal year and looks to earn around $1.58 in fiscal 2026, ending two months from now.
Analysts were projecting EPS around $2.31 for fiscal 2027, but given the weak guidance for the rest of this calendar year, I think they'd be lucky if it came in at $2.
All this means the stock is trading at 22.8 times next year's earnings. That doesn't appear cheap for a company struggling to turn itself around...
But keep in mind, as recently as 2024, EPS was $3.73, meaning today the stock is trading at only 12.2 times earnings from two years ago.
So, looking at the stock at these levels...
The key question is: Can Nike return to its former glory? Or has it been permanently impaired, either due to its own missteps or rising competition?
My instinct says it's the former. Nike's brand and global reach are among the strongest of any company in the world. But I need to do a deeper revisit of the stock.
Meanwhile, I would welcome feedback from my readers. If you have any insights or personal experiences with the brand, please send me an e-mail by clicking here.
Best regards,
Whitney