Nike’s Turnaround Is Underway, but Is the Dividend Growth Stock a Buy Before 2025?

By Investor Empires On Dec 26, 2024

Nike (NYSE: NE) It announced the results of the second quarter of fiscal year 2025 on December 19, Beat the upper and final grades (Although expectations were very low). However, the stock fell slightly on December 20 despite its 1.1% gain Standard & Poor’s 500 As investors digested Nike’s guidance and timeline for its recovery.

The company has increased its dividend for 23 consecutive years and currently stands at 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 whether… Dividend stocks Worth buying now.

Image source: Getty Images.

Nike stock is up just under 20% in the past nine years despite a massive 196% gain in the S&P 500. The stock briefly reached an all-time high in 2021, but that was an overreaction to the increases Spending surge caused by coronavirus. .

The company has faced many challenges, the biggest of which is its distribution model. In 2017, it decided to grow its direct-to-consumer (DTC) business under the Nike Direct brand to become less reliant on wholesalers, who act as intermediaries between consumers and Nike.

This 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 customize its marketing efforts by obtaining more knowledge about buyer behavior and preferences. Consider asking “You might also like” on your streaming service or online shopping site.

Besides expanding DTC through Nike Direct, the company also wanted to grow its apparel business to become less reliant on shoes. Finally, Nike has made a big push internationally, specifically in China.

In hindsight, none of these ideas were particularly bad, but rather left the company overextended and vulnerable to a slowdown. Nike Direct has done well, but it has hurt the company’s wholesale business. China has been in the doldrums for many companies, not just Nike.

The company faces increasingly strong competition from Lululemon Athletica And other hand clothes, and Decker outdoorsOwned by Hoka and Ali Holding Mainly on the footwear side (although these brands offer apparel as well). These DTC natives don’t have the old reliance on wholesale, making them more flexible than Nike.

Last quarter, sales declined across geographies, in footwear and apparel, and at both Nike Direct and wholesale. So the whole business is doing poorly. The directive did not provide a reprieve. Management expects a weak second half of its fiscal year as it lowers product prices to reduce inventory and bolster its product pipeline.

Its new CEO, Elliott Hill, said he hopes to bring Nike back to “winning” by focusing more on its footwear roots. Meanwhile, margins are likely to take a massive hit due to low inventory.

The main takeaway from the latest 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 is also the possibility that the transition will be delayed further if interest rates remain high for longer.

The Fed’s December 18 comment indicated it may slow the pace of interest rate cuts, which could limit consumer spending on discretionary goods. If the new administration goes ahead with tariffs, Nike’s margins could come under further pressure.

From the chart — to Data by YCharts; TTM = trailing 12 months.

As you can see in the chart, Nike’s sales are falling from record lows, and its operating margins are at their lowest levels in the last decade (if we exclude the brief decline caused by the pandemic). In short, Nike is already in a weak place and not well-positioned to deal with these potential challenges.

The stock is probably worth buying, but only if you’re willing to hold it for at least five years. The potential near-term risks and rewards do not look good, as things must go well for Nike to show improvements, while external factors such as rising interest rates and tariffs could exacerbate its problems.

However, there is no denying that the lower the stock price, the more attractive it becomes to long-term investors. Nike doesn’t look that cheap now because its profits are expected to decline in the near term. However, they may start to look very cheap after they reduce their inventory. A few years from now, it wouldn’t be surprising to see Nike succeed after the turnaround, especially if China recovers.

Dividends are an incentive to hold the stock during this period. The 2.1% yield is higher than the S&P 500 average of 1.2%. It is also worth noting that although Nike’s business has not performed well, it has managed to grow profits by a significant amount in recent years.

The last five annual increases were 8%, 9%, 11%, 11%, and 12%. I expect future increases to be in the high single digits. However, Nike has gone from being a historically growth-focused company to a viable passive income company.

In short, 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 skeptical people may want to keep Nike on their watch list and see how the company responds to potential challenges.

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Daniel Fulber He 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 holding on. The Motley Fool has Disclosure policy.

The turnaround at Nike is underway, but will dividend growth stocks be bought before 2025? Originally published by The Motley Fool