One of the more disappointing holdings in my Stocks and Shares ISA in recent years has been Nike (NYSE: NKE). The stock has fallen 20% over the past year and is only up 11% in five years.
That compares very poorly to the S&P 500‘s 84% return over the last half-decade.
The deadline for the current year’s ISA contributions is midnight on 5 April. Is this a chance to buy more shares before then? Or should I sell up and jog on? Let’s discuss.
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Incredible brand
The word ‘iconic’ gets bandied about a lot, but to me Nike is clearly such a brand.
I was wearing Nike trainers decades ago. Yet I still couldn’t walk five minutes out and about today without seeing that famous swoosh on a piece of fabric.
Puma, Ellesse, Reebok and others may come in and out of popularity, but Nike has remained at the top.
Moreover, the company still appears to have plenty of opportunity to grow sales in Asia and Latin America, where rising middles classes have more to spend on premium sportswear.
Innovation issues
However, there’s a snag. Critics argue the firm is relying too much on legacy products like basketball shoes and has stopped innovating.
In Nike’s Q3 earnings call on 21 March, CEO John Donahoe admitted as much: “We need to make adjustments…we must drive a continuous flow of new product innovation“.
Meanwhile, it’s losing market share to newer brands like Hoka and On Running, as well as New Balance, which has surged its popularity.
Additionally, the company has been in the headlines recently regarding its redesign of the St George cross on the new England football kit. Even the Prime Minister waded into the row.
Here, it seems there was a little too much product innovation for some people’s liking!
While this storm should quickly blow over, the possibility that Nike has lost its edge is now a worry for me.
Tepid growth outlook
In Q3, which ended 29 February, the company reported $12.43bn in revenue, a 1% rise year on year.
Net profit of $1.17bn translated into earnings per share (EPS) of $0.77 per share. That was down from $0.79 a year earlier, though it would have been $0.98 but for restructuring charges.
Basically, Nike is cost-cutting to preserve profits and margins, but a lack of growth has become a problem. Sales in China are sluggish. Even management admitted that the company “is not performing to our potential”.
Looking ahead, Nike sees a low-single-digits revenue decline in H1 of FY25 (which begins in June). This reflects weak global consumer sentiment. So there’s not much to get excited about.
My move
If the stock was down in the 15-18 price-to-earnings range, I’d consider buying more shares. This remains a world-class company, after all.
However, Nike is trading at 27 times earnings. That’s a growth stock multiple for a firm that has all-but-stopped growing revenue (at least for now). And that worries me.
Granted, there’s an extremely well-covered dividend yield of 1.6%, but that’s nothing to write home about. A quarter of the FTSE 100 is yielding over 5% right now.
On reflection, I’m putting the stock in the penalty box. I’ll wait for Q4 results in June and make a decision then.
