Nike's (NYSE: NKE) stock reached an all-time high of $172.49 on November 5, 2021, buoyed by its strong recovery from the pandemic, the growth of its Nike Direct business, and robust sales in China. However, the stock is now trading nearly 60% below that peak. The following four charts explain the reasons behind this decline:
Its Revenue Growth Flatlined
From fiscal 2020 to 2024, Nike's revenue grew at a compound annual growth rate (CAGR) of 8%. However, on a constant currency basis, its revenue rose just 1% in fiscal 2024. This slowdown was due to macroeconomic headwinds in the lower-end market, soft brick-and-mortar sales in China, uneven demand across the Europe, Middle East, and Africa (EMEA) region, and weak demand for some classic footwear franchises.
Nike expects a mid-single-digit drop in its reported revenue for fiscal 2025, with analysts anticipating a 5% decline.
Nike Direct Lost Its Momentum
Nike's direct-to-consumer (DTC) business, Nike Direct, has been a core growth strategy, increasing its gross margin by reducing reliance on wholesale retailers, strengthening its position against third-party e-commerce marketplaces, and providing better control over its supply chain and pricing. From fiscal 2020 to 2024, Nike Direct's revenue grew at a CAGR of 15%, compared to a 5% CAGR for wholesale revenue. Nike Direct accounted for 42% of Nike's sales in fiscal 2024, up from 40% in 2020. However, its growth stalled in fiscal 2024.
In April, CEO John Donahoe acknowledged that Nike had "over-rotated away from wholesale a little more than we intended" and announced a shift back to wholesale partnerships to alleviate pressure on operating margins and inventories, indicating a struggle to find new ways to boost first-party revenue.
Lackluster Growth in China
China was a major growth market for Nike, with double-digit revenue increases in the Greater China region on a currency-neutral basis for seven consecutive years through fiscal 2021. However, the last three years have seen a slowdown due to strict COVID-19 lockdowns, reduced consumer spending, and competition from domestic brands like Anta Sports and Li-Ning.
Unimpressive Gross Margin
Nike's gross margin declined in fiscal 2023 due to steeper markdowns and higher logistics costs. It improved in fiscal 2024 as the company reduced discounts, sold more expensive products, and benefited from lower logistics and freight expenses. Nike expects its gross margin to increase by 10 to 30 basis points in fiscal 2025. However, this is still lower than competitors like On Holding and Lululemon, which reported gross margins of 59.7% and 57.7%, respectively, in their latest quarters.
Is Nike a Potential Turnaround Play?
Despite the rising gross margin, analysts expect Nike's earnings to drop 21% in fiscal 2025 due to stalled revenue growth. The stock's current valuation of 23 times forward earnings might seem reasonable, but further declines are possible if Nike fails to stabilize its top line.
Therefore, it is recommended to hold off on investing in Nike until there are clear signs of recovery.
Its Revenue Growth Flatlined
From fiscal 2020 to 2024, Nike's revenue grew at a compound annual growth rate (CAGR) of 8%. However, on a constant currency basis, its revenue rose just 1% in fiscal 2024. This slowdown was due to macroeconomic headwinds in the lower-end market, soft brick-and-mortar sales in China, uneven demand across the Europe, Middle East, and Africa (EMEA) region, and weak demand for some classic footwear franchises.
Nike expects a mid-single-digit drop in its reported revenue for fiscal 2025, with analysts anticipating a 5% decline.
Nike Direct Lost Its Momentum
Nike's direct-to-consumer (DTC) business, Nike Direct, has been a core growth strategy, increasing its gross margin by reducing reliance on wholesale retailers, strengthening its position against third-party e-commerce marketplaces, and providing better control over its supply chain and pricing. From fiscal 2020 to 2024, Nike Direct's revenue grew at a CAGR of 15%, compared to a 5% CAGR for wholesale revenue. Nike Direct accounted for 42% of Nike's sales in fiscal 2024, up from 40% in 2020. However, its growth stalled in fiscal 2024.
In April, CEO John Donahoe acknowledged that Nike had "over-rotated away from wholesale a little more than we intended" and announced a shift back to wholesale partnerships to alleviate pressure on operating margins and inventories, indicating a struggle to find new ways to boost first-party revenue.
Lackluster Growth in China
China was a major growth market for Nike, with double-digit revenue increases in the Greater China region on a currency-neutral basis for seven consecutive years through fiscal 2021. However, the last three years have seen a slowdown due to strict COVID-19 lockdowns, reduced consumer spending, and competition from domestic brands like Anta Sports and Li-Ning.
Unimpressive Gross Margin
Nike's gross margin declined in fiscal 2023 due to steeper markdowns and higher logistics costs. It improved in fiscal 2024 as the company reduced discounts, sold more expensive products, and benefited from lower logistics and freight expenses. Nike expects its gross margin to increase by 10 to 30 basis points in fiscal 2025. However, this is still lower than competitors like On Holding and Lululemon, which reported gross margins of 59.7% and 57.7%, respectively, in their latest quarters.
Is Nike a Potential Turnaround Play?
Despite the rising gross margin, analysts expect Nike's earnings to drop 21% in fiscal 2025 due to stalled revenue growth. The stock's current valuation of 23 times forward earnings might seem reasonable, but further declines are possible if Nike fails to stabilize its top line.
Therefore, it is recommended to hold off on investing in Nike until there are clear signs of recovery.