Nike (NYSE: NKE) analysts are slashing their price targets and sending the stock to the bargain basement. The company’s Q4 results were good enough, but the guidance brought fear into the broader consumer discretionary market. The company cited pronounced headwinds, a lack of innovation, and lost dominance in its once-core segment when it doubled its expected revenue decline for 2025. Bad as it sounds, the long-term outlook remains bright, with growth, cash flow, and capital returns to entice investors back into the market. A rebound is possible, but it will take time.
Path to Recovery: Nike's Challenges and Potential Comeback Strategy
Nike struggled in Q4 with weakness in critical segments, leading to an unexpected contraction in revenue. The company reported $12.61 billion in net revenue for a decline of 1.7% YoY that outpaced the consensus estimates by 190 basis points. Weakness was seen in the Nike Direct and shoe segments, which fell by 8% and 6%, respectively. Both brands contracted, but the most significant decline was in Converse, down 18% YoY.
The report had some bright spots, but not enough to support the price action. Among them is a 5% increase in wholesales, which indicates normalization in that market. The caveat is that weakness in Nike Direct sales suggests weakness for other retailers, so the rebound in wholesale may be short-lived. Other bright spots include a 4% gain in the Apparel and a 47% increase in the Equipment segments.
The margin news is good. The company widened the gross margin on pricing and input costs, including freight. SG&A was also reduced to aid outperformance on the bottom line. The $0.99 in diluted earnings is up 50% compared to last year and beat the consensus reported by MarketBeat.com by $0.17.
The caveat is that inventory reduction is also in play, and the guidance is terrible. Execs now expect a mid-single-digit revenue decline in F2025, double the prior range, and there is a risk that it is too optimistic. Competitors like ON Holding (NYSE: ONON) are taking market share and are unlikely to return it quickly. ON is specifically dominating the running shoe world, with top athletes winning in their shoes. It also expands into other markets, including cross-training, where Nike will face increased competition.
Analysts Cut Targets for Nike: Stock Falls to Deep-Value Territory
Analysts are cutting their targets and will weigh on the price action this summer and in the second half, but the stock is unlikely to fall much further. Trading near $20 in pre-market action, the stock price aligns with the 2019 levels, with revenue 22% greater and diluted earnings up 60%. In this light, the new low target of $75 set by TD Cowen could be the floor for the market. Most other revisions have the market between $80 and $100, and Oppenheimer stands by its $120 target.
Capital return will help support the market. The company produced a cash flow positive quarter aided by inventory reduction that keeps the balance sheet a fortress and capital returns safe. The dividend is market-beating at $1.48 or 1.85% yield, with the stock at $80 and safe. The payout ratio is still below 45%, and share repurchases are also a factor. Repurchases reduced the count by 2.5% average in Q4 and are expected to continue providing leverage for investors in F2025. Regarding the balance sheet, current and total assets are up and liabilities low, with debt only 0.5x equity.
The technical price action is ugly. In premarket trading, Nike shares are down more than 15%, setting a multi-year low. Because the market is below previous support levels and above the next target for support, it could fall to $80 or lower before rebounding. A move below $80 would be bearish. In that scenario, Nike could shed another 25% and hit the $60 level, but that is not expected.
