Nike(NYSE: NKE ) reported its fiscal 2025 second quarter results on December 19, Beating top- and bottom-line estimates (Although expectations were very low). However, on December 20, the stock fell slightly despite rising 1.1% S&P 500 As investors digested Nike’s guidance and timeline for its recovery.
The company has raised its dividend for 23 consecutive years and currently has a yield of 2.1%, making it an interesting choice for passive income investors who believe in its turnaround story. Here’s what you need to know about Nike and what Dividend stock Able to buy now.
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Nike stock has risen just under 20% over the past nine years, despite a 196% gain in the S&P 500. The stock briefly reached an all-time high in 2021, but that was an overreaction to a COVID-induced surge in spending.
The company has faced several challenges, the biggest being its distribution model. In 2017, it decided to rebrand its direct-to-consumer (DTC) business under the Nike Direct label to become less dependent on wholesalers, who act as intermediaries between consumers and Nike.
The strategy had the potential to increase Nike’s margins, build direct relationships with consumers, and improve the effectiveness of its promotions. A company can better optimize its marketing efforts by gaining greater insight into buyer behavior and preferences. Think of the “You may also like” prompt on a streaming service or online shopping website.
In addition to expanding DTC through Nike Direct, the company wanted to expand its apparel business to become less dependent on footwear. Finally, Nike made a big push internationally, namely in China.
In hindsight, none of these ideas were particularly bad, they just left the company overextended and vulnerable to a downturn. Nike Direct has done well, but it has hurt the company’s wholesale business. China has been in a slump for many companies, not just Nike.
Since the company is facing increasingly strong competition Lululemon Athletica And on the other apparel side, and Deckers Outdoors– Ownership Hoka and On holding Primarily on the footwear side (although the brand also offers apparel). These DTC-origin companies do not have the legacy dependence on wholesale, making them more flexible than Nike.
In recent quarters, sales declined across its geographic regions, in footwear and apparel, and at both Nike Direct and Wholesale. So the whole business is going badly. The guidance did not provide relief. Management is forecasting a weaker second half of its fiscal year as it cuts prices on products to reduce inventories and strengthen its product pipeline.
Its new CEO, Elliott Hill, has said he hopes to get Nike “back to winning” by focusing more on its footwear roots. Meanwhile, margins are likely to take a big hit due to inventory cuts.
The key takeaway from the recent quarter and commentary on the earnings call was that the company’s turnaround will take longer than expected, and that its near-term results will be weak. There is also the possibility that the turnaround is further delayed if interest rates remain high for a long period of time.
The Federal Reserve’s comments on December 18 indicated that it may slow the pace of interest rate cuts, which could limit consumer spending on discretionary goods. If the new administration moves forward with tariffs, there could be further pressure on Nike’s margins.
As you can see in the chart, Nike’s sales are falling from record highs, and its operating margins are at their lowest level in a decade (if you take out the brief pandemic-induced plunge). In short, Nike is already in a vulnerable spot 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 near-term risks and potential rewards don’t look good, as a lot has to go right for Nike to show improvement, while external factors like higher interest rates and tariffs could add to its woes.
However, there is no denying that the further the stock falls, the more attractive it becomes for long-term investors. Nike doesn’t look so cheap now that its earnings are expected to decline in the near term. However, it may appear much cheaper after working through its inventory reductions. A few years from now, it wouldn’t be surprising to see a successful turnaround for Nike, especially if China recovers.
Dividends are 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 is also worth mentioning that even though Nike’s business is not doing so well, it has managed to increase the dividend substantially in recent years.
The last five annual increases were 8%, 9%, 11%, 11%, and 12%. I would expect future growth to be in the high-single-digit percentages. But still, Nike has gone from being a historically growth-focused company to a viable passive income play.
In short, investors who are confident in the brand and don’t mind waiting for a turnaround can consider buying the stock now and sitting back and collecting passive income. But those who are skeptical want to put Nike on a watch list and see how the company responds to potential challenges.
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Daniel Folber Nike has positions and the following options: Long January 2025 $70 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.
