Long-Term Investors Should Jump on the Nike Selloff

Unless you’re shopping at the outlet mall, it can be hard to find authentic Nike (NYSE: NKE) products at bargain prices. The same goes for Nike’s stock which hasn’t often gone on sale over the course of its 37-year trading history.

Late last week after Nike reported mixed first-quarter results, its shares gapped lower. This was an unusual event for a stock that investors have grown accustomed to seeing jump higher on the heels a quarterly update.

There’s no reason to panic. The near-term issues gripping the athletic apparel powerhouse are industry-wide. When the dust eventually settles, the strongest brands and most financially fit companies will emerge as winners—and Nike will once again be at the front of the pack.

Why Did Nike Stock Go Down?

After the market close on September 23^rd, Nike reported that fiscal first-quarter revenue was up 16% to $12.2 billion which fell short of the $12.5 billion analyst consensus. Although earnings per share (EPS) rose 22% and exceeded the Street’s forecast, the market was too bummed about the top-line shortfall for it to matter.

Adding to the disappointment was management’s tepid revenue guidance for the current quarter. The revised $11.1 billion estimate was well shy of the Street’s previous expectation of $12.7 billion. Earlier in the year, Nike had projected it would hit $50 billion in revenue for fiscal 2022 but that too was downwardly revised to $46.8 billion.

The weaker-than-expected sales outlook relates to the supply chain constraints that have impacted the retail industry and plenty of other industries since the start of the pandemic. Worsening coronavirus conditions in Nike’s key manufacturing centers are significantly weighing on production.

In Vietnam, where Nike makes most of its footwear and a good chunk of its apparel, plant closures cost the company 10 months’ worth of production last quarter. The country remains in lockdown until at least October 1^st. Government restrictions and supply chain bottlenecks in other parts of Asia are also impacting Nike production and doubling shipping times to North America. Simply put, Nike is struggling to produce enough stuff to meet demand.

What are Nike’s Growth Prospects?

The most exciting part of Nike’s latest report was that sales in the Nike Direct business increased 28%. This segment includes the Nike website as well as its company-owned stores. Nike Direct sales accounted for nearly 40% of total sales. The overlooked expanded gross margin also had much to do with the efficient Nike Direct division.

This bodes well for the future because online is clearly where consumers are headed. With or without a pandemic, people will continue to embrace the convenience of e-commerce and Nike’s customized offerings will help it stand out even more. There will come a time when inventory levels normalize. When they do, Nike will return to being an athletic goods machine with the Nike Direct business leading the charge.

An increasing focus on company-owned stores will also help drive growth. Nike’s own stores are strategically located in tourist hotspots and other bustling metropolitan areas that see heavy customer traffic. Relying more on its own footprint and less on third-party retailers will ultimately mean more revenue and profits in Nike’s pocket.

Nike is sitting on $13.7 billion of cash. Aside from expanding the Nike Direct platform globally, the company will use much of the money to do what it does best—innovate. Its ability to launch new sportswear and equipment that appeal to the modern consumer is second to none. Nike will continue to invest in R&D and crank out new products that drive growth and make it difficult for competitors to gain ground.

And as the cash flow machine keeps churning, Nike will still have plenty of cash left over to reward loyal shareholders. The company has raised its dividend for 19 straight years. It also has an active buyback program with almost $10 billion remainings that should provide a level of support for the stock. 

Is Nike Stock a Buy?

Recall that earnings advanced 22% last quarter during a time in which Nike faced several challenges that were out of its control. This isn’t a result that should be brushed aside in favor of near-sighted worries. It showed that Nike is resilient and will remain so.

Yes, the supply challenges are important and will put a dent in the next few quarters’ results. But eventually, vaccination rates will rise, COVID caseloads will subside, and Nike’s factories will reopen. In the process, shipping congestion will ease, and Nike will have more products available to sell to eager consumers.

Nike’s competitors would gladly trade places with their heated rival. Demand for Nike sneakers, clothes, and sports equipment is as strong as ever. Supply problems can work themselves out. Demand problems are a bigger concern and certainly not one that Nike faces.

On top of the supply issues, Nike is dealing with elevated freight and wage expenses as are its peers. But given Nike’s brand power, the company can largely pass on these costs through price increases and do so as well as any other consumer discretionary business.

Over time, Nike will successfully work through its current challenges. Strong demand will win out and quarterly results will shine. Even a powerhouse like Nike has had its share of downs, but it has always been able to get up and charge ahead.

Nike shares may continue to get cheaper in the weeks ahead as the worrisome supply headlines roll in. This will just make the stock that much more attractive for long-term investors that keep their eyes on the finish line.