Nike(NYSE: NE) reported its fiscal 2025 second quarter results on December 19, beat top and bottom line estimates (although expectations are very low). However, the stock fell slightly on December 20 despite a 1.1% increase in the S&P 500 as investors digest Nike's guidance and the timeline of its recovery.
The company has increased its dividend for 23 consecutive years and currently yields 2.1%, making it an interesting option for passive income investors who believe in its turnaround story. Here's what you need to know about Nike and whether the dividend stock worth buying now.
Image source: Getty Images.
Nike stock is up just under 20% in the past nine years despite a rapid 196% gain in the S&P 500. The stock briefly hit an all-time high in 2021, but that was an overreaction to spending surges caused by COVID.
The company has faced several challenges, the biggest being its distribution model. In 2017, it decided to grow its direct-to-consumer (DTC) business under the Nike Direct label to become less dependent on wholesalers, who act as intermediaries between consumers and Nike.
The strategy had the potential to increase Nike's profits, build relationships directly with consumers, and improve the effectiveness of its promotions. A company can better adjust its marketing efforts by gaining more insight into buyer behavior and preferences. Think of the “you might also like” prompt on a streaming service or online shopping site.
In addition to expanding DTC through Nike Direct, the company also wanted to grow its apparel business to become less dependent on footwear. Finally, Nike made a big push internationally, namely into China.
In retrospect, none of these ideas were particularly bad, they just left the company overextended and vulnerable to slowdown. Nike Direct has gone fairly well, but it has hurt the company's wholesale business. China has been in decline for many companies, not just Nike.
The company faces increasingly strong competition from Lululemon Athletica and others on the clothing side, and Outdoor Deckers-owns Hoka and On Payment mainly on the footwear side (although these brands also offer clothing). These DTC-native companies do not have the legacy reliance on wholesale, potentially making them more flexible than Nike.
In the recent quarter, sales fell across its geographies, in footwear and apparel, and at Nike Direct and wholesale. So the whole business is doing badly. Guidelines did not provide recall. Management anticipates a weak second half of its fiscal year as it cuts prices on products to reduce inventory and strengthen its product pipeline.
Its new CEO, Elliott Hill, has said he hopes to get Nike “back to winning” by focusing more on its roots in footwear. Meanwhile, profits are likely to take a huge hit due to the reduced inventory.
The key takeaway from the recent 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 change will be delayed even more if interest rates remain higher for a longer period.
The Federal Reserve's commentary on December 18 indicated that it could slow the pace of interest rate cuts, which could limit consumer spending on discretionary goods. If the new administration moves forward with tariffs, Nike's margins could come under further pressure.
As you can see in the chart, Nike's sales are down from an all-time high, and its operating profit is at its lowest levels in the last decade (if you don't include the short plunge caused by a pandemic). In summary, Nike is already in a vulnerable place and is 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 near-term risks and potential rewards don't look good, as a lot has to go right for Nike to show improvements, while external factors such as higher interest rates and tariffs could compound its woes.
However, there is no denying that the more the stock falls, the more attractive it becomes to long-term investors. Nike doesn't look that cheap now as its earnings are expected to decline in the near term. However, it could start to look very cheap once it works through its inventory reductions. A few years from now, it wouldn't be surprising to see a successful Nike turnaround, especially if China improves.
The dividend is an incentive to hold the stock through this period. A yield of 2.1% is higher than the S&P 500 average of 1.2%. It is also worth noting that, although Nike's business has not been performing as well, it has still managed to raise the dividend significantly in recent years.
The last five annual increases were 8%, 9%, 11%, 11%, and 12%. I would expect future increases to be in the high single digit percentages. But still, Nike has gone from a historically growth-oriented company to a viable passive income play.
In summary, investors who are confident in the brand and don't mind waiting for a turnaround could consider buying the stock now and sit back and collect passive income. But skeptics may want to keep Nike on a watch list and see how the company responds to potential challenges.
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Daniel Foelber He has jobs at Nike and has the following options: Long January 2025 $70 calls on Nike. The Motley Fool has posts and recommends Deckers Outdoor, Lululemon Athletica, and Nike. The Motley Fool recommends On Holding. The Motley Fool has a disclosure policy.
