Nike Stock: Buy or Sell? | My Final Verdict | NKE Stock Deep Dive Part 5

Nike's sales are falling and the management team didn't try to sugarcoat the situation. They said it was going to take a while before things improve. In their most recently completed quarter, sales in North America started improving, but sales in Greater China are really declining rapidly. So, given this situation and backdrop, is Nike stock a buying opportunity at its 52-week low? Let's answer that question together in this video. I want to thank The Motley Fool for sponsoring this video. Visit fool.com/parkev for the 10 best stocks to buy now. Overall, sales fell 1% compared to the same quarter last year. There was modest growth in North America, but it was more than offset by declines in Greater China. Nike Direct, which was a critical strategy of the previous CEO, was down 9%. Nike Digital was down 12%. Nike stores overall, down 7%. This was a primary focus of the previous CEO that wanted to go direct to consumer. Since Elliott Hill took back that top job or took the top job, he's focused more on rebuilding those relationships with wholesalers. And as a result, wholesale revenue grew 1%. So, that is early evidence that the rebuilding of relationships with wholesalers is starting to bear fruit. Just barely, right? 1% growth. But, when you compare it to the rest of the business, it really stands out when Nike Direct is down 9%, Nike Digital is down 12%, Nike stores are down 7%, and then you look at wholesale and it's up 1%. It really stands out and it really shows the evidence that this process is beginning to bear fruit. Gross profit margin came in at 49.2%, but that was driven partly by the tariff refund, which added 900 basis point benefit to the company's profit margin. Excluding that benefit, gross margin would have been 40.2%, which would have been down 10 basis points compared to the same quarter last year. So, not only are sales declining overall, but their gross margins are also declining. So, this is an organic decline in demand for Nike's products. Sometimes you'll get one or the other when the management team makes a conscious decision to, let's say, raise prices, remove all discounts, try and sell product at higher average selling prices overall across the board. In those kinds of situations, you'll see sales decline because, you know, basic economics like I teach at university, supply and demand, right? When prices go up, demand goes down. It's the basic econ econ 101 relationship. But in this case, sales are falling and margins are falling because the decline in sales is not a result in higher selling prices or a decrease in promotions from Nike, but the decrease in sales is due to a macroeconomic headwind. People have less money to spend, and it's due to increasing competition. People have more options now when they're looking at this category than they did a few years ago. So, inventory was flat compared to the same quarter last year, which is what you want to see when a business is experiencing a decline in demand. You don't want to see them have too much inventory. You want to see the management team anticipate that sales are declining and not get caught off guard with all this extra inventory that they're going to then need to discount significantly to sell, and that's going to make a situation worse. So, at the least, the management team is dealing with the current situation effectively by keeping inventory limited. And I would actually prefer that inventory be down low single digits compared to the same quarter last year as we progress through the next few quarters because I don't think the macroeconomic situation is going to get any better. I don't think consumer finances are going to get any better. I think as we go forward people are depleting their savings accounts, whatever they had saved up. They're also borrowing on their credit cards, and so that those credit cards are getting maxed out. And so, their ability to withstand their lifestyle, to live a current lifestyle based on what they were living, you know, 6 months ago, 12 months ago, 18 months ago, that is going to diminish. They're going to have to make difficult choices. People are already making difficult choices, trading off some of these non-essential things like products from Nike for more essential things like paying your rent, paying your car payment, buying groceries for your household. All of those things now are more than they were last year. They're more than they were 3 years ago, and they're significantly more than they were in 2019. People's incomes haven't increased by anywhere near the levels of prices for the essential things that people are buying. Oh, I know inflation might show that it's up just 3% year over year. In fact, the most recent reading for inflation was 3.4%. But, that discounts the factors within inflation where most of the inflation is in categories that are what I call not substitutable. Things like rent or health care. What can you substitute those things for? There isn't anything to substitute for rent unless you want to be homeless and live in your car. There isn't anything you can buy instead of house household. Right? It's not like chicken. If prices for chicken increase, you can buy fish, or you can buy beef, or you can buy pork. You have options. But when the price of rent is increasing, you don't have an option. You don't have a backup. You don't have something you can do. It's more difficult to adjust to that circumstance, moving out of state, or moving to a new city. You might be connected to a job, you might be connected to a school, you might be connected to family in the area. It's a lot more difficult to substitute away from that. What about health care? What are you going to substitute health care for? Can't really substitute anything for health care. You've got to just pay those higher prices, and so people are spending so much more on those essential categories that there's less disposable income left to make choices on, do I buy this Nike shoe, or do I buy that Adidas shoe, or that shoe from On Holdings? These companies are all experiencing headwinds, including the ones I mentioned, Lululemon, another one. And so, I'd like to see Nike actually decrease their inventory as we move forward to prepare for this oncoming difficulty in the macroeconomic situation for consumers. So, it's important to remember that Nike stock is reflecting these difficulties, these challenges that the business is facing. This stock used to trade for $175 a share. And of course, I've been following Nike for many years, and I told investors that at those levels it was too expensive. Even when it fell to 100, I said it was too expensive. Even when it fell to 75, or $50, I warned investors it was still too expensive, that the headwinds that they were facing was so significant, it would take such a long time to recover from that even at 75 or 50 it was too expensive. Not until the stock fell to 40 that I upgrade Nike stock to a buy. So that was just a few weeks ago when the share price fell to 40 I upgraded Nike stock to a buy. And now it's trading at a forward price to earnings of just 16. This is the cheapest you've been able to buy Nike stock in a really long time. It's not only is it trading at its 52-week low, but when you measure it on a forward price to earnings ratio it's trading at the lowest level it's traded for going back many many years. So these headwinds that I've been talking about for a while now are finally fully reflected in Nike's valuation now. So when it fell to 40 I felt that was a good point to start accumulating Nike stock. I warned also that it might have been a little early because as we see the turnaround is not happening anytime soon. But over the next 3 months Nike sales are likely to remain under pressure. I wouldn't be surprised if the next quarter is another quarter of year-over-year declines in sales and the quarter after that is another quarter of year-over-year declines in sales before maybe three quarters from now they start to generate growth again. And that's if. And so I might have been early with that upgrade to Nike stock at $40. But given the strong brand Nike boasts and the loyalty from consumers that have been buying Nike products for decades I think that $40 was a great entry point and it was a good start. You can start allocating dollar cost averaging starting 40. And then if it falls further and it has it's now trading at 36 as of this recording you can kind of dollar cost average your way into it so that your per-share price overall declines if the share price continues declining. So, I also updated my discounted cash flow valuation analysis for Nike following the deep dive I recently did. The fair value estimate came to $31 per share. As I mentioned, the current market price very close to its 52-week low at $36.35. 52-week low was $36.18. So, it's still looking slightly overvalued when measuring using my discounted cash flow model, but when measuring using the forward PE multiple, it looks uh very undervalued. So, comprehensively, I can still say that Nike stock looks slightly undervalued or undervalued. And given the strong relationship Nike boasts with its customers, and of course the strong distribution channels Nike has, rebuilding those relationships and early signs that that rebuilding effort is bearing fruit with 1% growth in wholesale revenues, I think it's a good time to start accumulating Nike stock. So, I mentioned I upgraded Nike stock when it fell to $40, and that was around August 19th when I upgraded Nike stock to a buy. And today I will be reiterating that buy ranking for Nike stock.