Nike's Turnaround Is Underway, but Is the Dividend Growth Stock a Buy Before 2025?
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Nike(NYSE: NKE) reported its fiscal 2025's second-quarter results on Dec. 19, beating top- and bottom-line estimates (although expectations were very low). However, the stock fell slightly on Dec. 20 despite a 1.1% gain in the S&P 500 as investors digested Nike's guidance and the timeline of its recovery.
The company has increased its dividend for 23 consecutive years and currently yields 2.1%, making it an intriguing option for passive income investors who believe in its turnaround story. Here's what you need to know about Nike and whether the dividend stock is worth buying now.
Image source: Getty Images.
Nike stock is up just under 20% in the past nine years despite a rip-roaring 196% gain in the S&P 500. The stock briefly hit an all-time high in 2021, but that was an overreaction to COVID-induced surges in spending.
The company has run into 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, which act as intermediaries between consumers and Nike.
The strategy had the potential to increase Nike's margins, build relationships directly with consumers, and improve the effectiveness of its promotions. A company can better customize its marketing efforts by having more insight into buyer behavior and preferences. Think of the "you may also like" prompt on a streaming service or online shopping website.
Besides expanding DTC through Nike Direct, the company also wanted to grow its apparel business to become less dependent on footwear. Lastly, Nike made a big push internationally, namely into China.
In hindsight, none of these ideas were particularly bad, they just left the company overexpanded and vulnerable to slowdowns. Nike Direct has gone decently well, but it has damaged the company's wholesale business. China has been in a downturn for many companies, not just Nike.
The company faces increasingly strong competition from Lululemon Athletica and others on the apparel side, and Deckers Outdoor-owned Hoka and On Holding mainly on the footwear side (though these brands also offer apparel). These DTC-native companies don't have the legacy dependence on wholesale, making them arguably more flexible than Nike.
In the recent quarter, sales declined across its geographies, in footwear and apparel, and in both Nike Direct and wholesale. So the entire business is doing poorly. Guidance didn't provide a reprieve. Management is forecasting a weak second half of its fiscal year as it slashes prices on products to reduce inventory 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 roots in footwear. In the meantime, margins will likely take a massive hit due to the inventory reduction.
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 its near-term results will be weak. There's also the possibility that the turnaround gets even more delayed if interest rates stay higher for longer.
Federal Reserve commentary on Dec. 18 indicated that it could slow down the pace of interest rate cuts, which could limit consumer spending on discretionary goods. If the new administration moves forward with tariffs, Nike's margins could be further strained.
As you can see in the chart, Nike's sales are dropping from record highs, and its operating margins are at their lowest levels in the past decade (if you exclude the brief pandemic-induced plunge). In sum, Nike is already in a vulnerable place and isn't 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 improvements, whereas external factors like higher interest rates and tariffs could compound its woes.
However, there's no denying that the further the stock falls, the more attractive it becomes for long-term investors. Nike doesn't look that cheap now because its earnings are expected to decrease in the near term. However, it could begin to look very cheap after it works through its inventory reductions. A few years from now, seeing a successful Nike post-turnaround wouldn't be surprising, especially if China recovers.
The dividend is an incentive to hold the stock through this period. A 2.1% yield is higher than the S&P 500 average of 1.2%. It's also worth mentioning that even though Nike's business hasn't been performing that well, it has still managed to raise the dividend by a considerable amount in recent years.
The last five annual raises were 8%, 9%, 11%, 11%, and 12%. I would expect future raises to be in the high-single-digit percentages. But still, Nike has gone from being a historically growth-centered company to a viable passive income play.
In sum, investors who are confident in the brand and don't mind waiting for a turnaround could consider buying the stock now and sitting back and collecting passive income. But folks who are skeptical may want to keep Nike on a watch list and see how the company responds to potential challenges.
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Daniel Foelber has positions in Nike and has the following options: long January 2025 $70 calls on Nike. The Motley Fool has positions in and recommends Deckers Outdoor, Lululemon Athletica, and Nike. The Motley Fool recommends On Holding. The Motley Fool has a disclosure policy.
