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Nike (NKE 1.32%) shares have kept pace with the market over the last several years. Since early 2020, just before the start of the pandemic, the stock has risen 25%, compared to the 22% increase for the S&P 500. Shareholders have to be happy with that performance, given all of the volatility around consumer spending, inflation, and input costs during that time.
The footwear and apparel giant is aiming for a return to its more usual growth pattern in 2023 with potentially higher profitability ahead. Let’s look at where those trends might push the stock over the next several years and why investors might want to hold on through that time period.
Nike is in the consumer-discretionary industry, which may make it sensitive to the weak spending patterns that typically come with a recession. The good news is the company isn’t seeing the type of flashing warning signs that might indicate such a slowdown is ahead in 2023.
In fact, sales in its fiscal 2023 second quarter (ended Nov. 30) were up a healthy 27% after accounting for currency-exchange rate shifts. That bounce marked accelerating demand in key markets like the U.S. and Europe and put Nike closer to the growth-stock performance of Lululemon Athletica.
“Consumer demand for Nike’s portfolio of brands continues to drive strong business momentum in a dynamic environment,” CFO Matthew Friend said in late December. A recession would heavily influence the path of stock returns investors see over the next few years, but Nike is currently busy meeting growing demand.
Nike’s stock returns will look much better through 2025 if the company can steadily boost its profit margins, as Lululemon has done over the last few years. Gross profit margin has been heading the other way instead, though, falling three full percentage points in the most recent quarter. Nike remains well below its smaller peer on this score.
Data by YCharts.
Management has several initiatives aimed at boosting profitability, anchored on a steady stream of new product introductions. Nike is also selling more directly to consumers, rather than relying on retailing partners like Foot Locker. These sales are far more profitable than the wholesale division. If Nike can succeed here, the business has a good shot at pushing gross margin toward 50% by 2025.
The other key factor driving returns over the next several years is Nike’s current valuation, which is attractive. Sure, you could have purchased the stock cheaper than its current price-to-sales ratio of 4.1 at several points in the last year, but that figure is still in line with its five-year average.
The main risk worrying Wall Street right now is that Nike could see sharply slowing sales and reduced earnings if a recession strikes. That development would also likely come with shrinking margins as the company works to get inventory back in line with demand. Nike has spent the better part of a year rebalancing its inventory amid slowing demand trends, and another period like that would pressure the stock in 2023 and beyond.
But investors who don’t mind some volatility can still happily add this stock to their watchlists. Nike is in a much stronger inventory position than it was a year ago, sales trends are improving, and the pipeline of product introduction is packed.
There’s no telling where the economy will go in the next three years, but Nike’s stock has a good chance of generating market-beating returns, just as it has over the prior three-year period.
Demitri Kalogeropoulos has positions in Nike. The Motley Fool has positions in and recommends Lululemon Athletica and Nike. The Motley Fool recommends Foot Locker and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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