A consumer slump could weigh heavily
Shares of the famous sportswear manufacturer Nike (NKE) are poised to give up their pandemic gains, shedding another 5.6% on Thursday. The stock has been incredibly resilient in the face of economic storm clouds. Yet the stock now finds itself down about 40% from peak to peak. Despite the severity of the decline, Nike stock is still not cheap, especially considering the heightened risks of a consumer slump.
For Nike, these are primarily supply-side challenges, including supply disruptions caused by COVID-19. So far, demand has been robust. During the last quarter, Nike performed well despite delays and disruptions. Whether the demand for sportswear remains once the supply chain is fully in order is a major question mark.
With the odds of a recession rising with each rate hike from the Federal Reserve, Nike could see demand start to fall. Without a doubt, discretionary items tend to be one of the first to be cut from the budget when times are tough.
In the Chinese market, demand has slowed significantly, with yet another quarter of year-on-year sales declines. Most of the drop in demand was related to the strict restrictions related to COVID-19. However, the impact of the weakening economy on consumer spending should not be overlooked.
For now, Nike is doing almost everything right. Management expects supply chain issues to disappear along with its impact on margin erosion. It is not because the supply is getting back in order that the demand will remain.
As more evidence of a consumer recession mounts, Nike stock could risk adding to its losses. The earnings multiple of 28.3 times is still quite high, given the circumstances. Given the headwinds and the rich multiple, I’m inclined to stay neutral on the stock.
On TipRanks, NKE scores 9 out of 10 on the Smart Score spectrum. This indicates high potential for the stock to outperform the broader market.
Can the brand rebound in a recession?
Nike is a force to be reckoned with in athletic footwear and apparel. Yet a strong brand does not make the company’s products a “must-have” as opposed to a “nice-to-have”. In turbulent economic times, the “must haves” are the haves and the “nice to haves” tend to be the have-nots.
Looking ahead, things are pretty bleak in the Americas. That said, the Chinese market could be a source of relief, as the economy rebounds from the COVID-19 shutdowns.
China has been a major growth market for Nike for quite some time. With subtle signs of recovery in China, Nike could very well have some relief as the US economy gradually fades from the impact of rate hikes.
Even as demand in the states recedes, Nike is poised to continue investing in its business, with the e-commerce platform and various other intriguing initiatives that could help Nike emerge from the next recession in an even stronger position. solid. In the end, that’s really all you can ask of a company.
Nike’s direct-to-consumer (DTC) strength has been remarkable over the years. As the company continues to bet big on e-commerce, more sales are expected to continue going digital, which will put strong upward pressure on Nike’s margins.
On the contrary, a consumer slump will act more as a drag on a company like Nike than a crisis that derails the company’s strong fundamentals. For now, it will be interesting to see how Nike fares as Chinese consumers seek a boost.
The Taking of Wall Street
According to TipRanks analysts’ rating consensus, NVDA stock is looking like a Moderate Buy. Out of 23 analyst ratings, there are 17 buy recommendations and six hold recommendations.
The average Nike price target is $155.50, which implies an upside of 44.88%. Analyst price targets range from a low of $106.00 per share to a high of $185.00 per share.
The Bottom Line on Nike Stock
Nike’s stock has a legendary brand with a wide moat surrounding it. The executives may be outstanding traders, but I can’t say I’m a big fan of recent stock buybacks. During the fiscal third quarter, Nike repurchased $1.2 billion of its own stock.
Such stock buybacks are only a good thing if a company buys back cheaply. Arguably, the stock remains high in the face of a recession, leaving plenty of room for the downside as this market continues to punish discretionary businesses with high price-earnings (P/E) multiples.
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