This Phenomenal Stock Just Beat Wall Street Estimates: But Is It a Smart Buy Right Now?
There are still some well-known companies reporting earnings these days. Sportswear juggernaut Nike (NYSE: NKE) is one of them. For the three-month period that ended Feb. 29 (fiscal Q3 2024), the global leader in sports apparel and footwear posted revenue of $12.4 billion and diluted earnings per share (EPS) of $0.77. Both figures easily beat Wall Street's expectations.
However, the stock immediately dipped 7% following the news. As of this writing, shares of Nike sit a whopping 47% below their all-time high from November 2021. That's despite this being a phenomenal stock over the past few decades. So, is it a smart idea to buy the dip?
Softer demand trends
To its credit, Nike was able to exceed analysts' forecasts, but investors are concerned about other factors that add some context to the latest numbers. For starters, that Q3 revenue figure was basically flat year over year.
Nike may have beaten expectations in the important North America region, but China was a different story. In what has typically been Nike's fastest-growing region, things are cooling off. Revenue in China was up just 5% compared to Q3 2023.
More broadly, Nike is dealing with consumers who are less interested in spending on discretionary items. That makes sense, given ongoing inflationary pressures, higher interest rates, and a still-uncertain macro backdrop.
The bright spot, however, was that gross margin is holding up. It came in at 44.8% last quarter, up from 43.3% in the year-ago period. Favorable pricing helped counteract ongoing promotional activity. Nike's inventory balance also decreased 13% over the past 12 months.
One of Nike's key rivals, premium brand Lululemon Athletica, also reported a sales slowdown in its latest fiscal quarter. However, the athleisure pioneer was still able to grow revenue 16% during that period. This highlights just how weak the demand is that Nike is facing these days.
There also isn't much to get excited about when it comes to Nike's near-term outlook. Management reiterated that sales will likely rise by only 1% this fiscal year. Making matters worse, for the first half of fiscal 2025, which roughly coincides with the second half of calendar 2024, revenue is expected to decline.
Driving efficiencies
Like many businesses out there, Nike has embarked on cost-cutting efforts to right-size operations in a lower-demand environment. About three months ago, executives revealed plans to cut $2 billion across the organization over the next three years, with a focus on simplifying product offerings, reducing management layers, and increasing automation.
Nike also implemented worker layoffs. I'm sure initial results from these moves helped the company beat consensus estimates for EPS. In my opinion, it's always encouraging to see a business place extra attention on figuring out ways to cut expenses. The issue, though, is that there is a limit to how much can be done. After a certain point, management needs to get back to thinking about growth, which is a serious concern right now.
At the end of fiscal 2021, the executive team laid out long-term financial targets. One goal was to achieve mid- to high-teens EPS growth over the next four years. We are nearing the end of that forecast period, and Nike is coming up well short of its objectives. So it's not easy to be optimistic at all about this business and the direction it's heading in.
The shares would be a screaming buy if they sold at a cheap valuation, but that's not the case. Nike stock sports a price-to-earnings ratio of 27.4. Not only should investors wait for growth to pick back up, but they should also wait for a major valuation pullback before scooping up shares.
Should you invest $1,000 in Nike right now?
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lululemon Athletica and Nike. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
This Phenomenal Stock Just Beat Wall Street Estimates: But Is It a Smart Buy Right Now? was originally published by The Motley Fool
