Shares of Nike (NKE -1.03%) plunged after the athletic apparel and footwear company disappointed investors by forecasting a surprise sales decline for fiscal 2025. The stock is now down about 30% year to date.
These recent losses have extended Nike’s decline since the stock hit its peak in 2021, and shares are down about 10% over the past five years.
Let’s take a look at Nike’s most recent quarterly results and the issues it faces to determine whether this is a buying opportunity.
Surprising guidance
For its fiscal 2024 fourth quarter (ended May 31), Nike’s sales declined 2% year over year to $12.6 billion. Nike brand revenue fell 1% to $12.1 billion, while Converse sales plunged 18% to $480 million.
By selling channel, Nike direct revenue dropped 8% to $5.1 billion, and wholesale revenue rose 5% to $7.1 billion. However, the company still managed to expand its gross margin 110 basis points to 44.7%, helped by lower ocean freight costs and pricing changes. Management also reduced operating expenses with selling, general, and administration (SG&A) costs falling 7%.
As a result, earnings per share (EPS) surged 50% to $0.99, despite the overall sales decline. Inventories, meanwhile, were down 11% year over year to $7.5 billion.
While the quarterly results were mixed, it was guidance that shocked investors.
The company now expects fiscal 2025 sales to decline by mid-single digits, reversing CFO Matt Friend’s comments from the March earnings call when he said sales “will inflect in the second half and grow next year on the top line.”
For its fiscal Q1, management is guiding for revenue to decline 10% year over year “with the first half down high single-digits.”
The company blamed challenges in its direct business, a weak wholesale order book, a softer China, and the aggressive actions it is taking to manage its classic footwear franchises. That sounds like almost every segment across Nike is experiencing issues, and these issues are spread across multiple geographies as well.
On the bright side, the company is looking for its gross margin to expand 10 to 30 basis points for the year, and its inventory position looks pretty manageable. This should not be overlooked because when apparel and footwear companies run into sales trouble, it can often be exacerbated by inventory and gross margin woes.
Is this an opportunity to buy the stock?
Nike is an iconic brand, although clearly it has run into issues in the past few years. The company hopes to reignite growth through product innovation, and it has always been a marketing machine.
From a valuation perspective, the company now trades at a forward price-to-earnings (P/E) ratio of 24. Nike has generally traded at a premium to the broad market given its brand power. However, for a company with a shrinking top line, its valuation appears frothy at the moment.
Data by YCharts.
Overall, Nike should be able to turn around its fortunes, but given the struggles the company has had forecasting its business, shareholders should expect heightened volatility from the stock, especially around its earnings reports.
If the valuation falls further, I’ll be scooping up shares. Until then, investors should keep Nike on their watch lists.
