Nike has been one of the poorest performers in the Dow Jones this year, but some changes going on at the company make me think things will be turning around sooner rather than later.
As of market close on Dec. 12, the S&P 500 (^GSPC -0.00%) and Nasdaq Composite (^IXIC 0.12%) indexes have gained 27% and 32% in 2024, respectively. Returns like that make it hard for investors to lose money.
One of the best-performing sectors in 2024 is consumer cyclical, which has gained 32% — putting it right on par with the returns of the Nasdaq. Within the consumer cyclical market, however, one sub-industry has been particularly weak. As of this writing, the footwear and accessories market has dropped by 10% this year. This is not an anomaly — the footwear and accessories industry has dropped by nearly 18% over the last 12 months, and by 36% over the last three years.
Given such dismal returns, it’s easy to point to inflation and high interest rates as primary culprits impacting the footwear and apparel markets. And while that isn’t wrong per se, there’s more to the picture when it comes to analyzing individual companies.
Below, I’m going to explore what has caused Nike (NKE -0.91%) stock to drop by 28% this year — making it the second-worst-performing stock in the Dow Jones Industrial Average (^DJI -0.20%). Furthermore, I’ll break down how Nike is changing things up and looking to right the ship.
What’s been going on at Nike?
For the last several years, Nike has instituted a number of changes in the business that ultimately did not work out. Let’s explore some of the moves the company made, and assess why they backfired.
- Metaverse: You may remember that back during the peak days of COVID, a concept known as the metaverse started gaining some traction. The metaverse represents a digital world where people can interact and engage with others through virtual reality, gaming, and more. One of the pillars supporting the metaverse were digital assets, in particular non-fungible tokens (NFTs). NFTs became incredibly popular for a period of time due to their scarcity and perceived exclusivity. Nike attempted to capitalize on this movement through the acquisition of virtual sneaker company RTFKT.
- Direct-to-consumer: In recent years, Nike has also made meaningful changes to its distribution strategy. Namely, the company parted ways with a number of brick-and-mortar retailers in an effort to double down on its own branded storefronts and online marketplace.
If Nike’s five-year stock performance is any indication, things have been pretty rough for the company for a while now.
How is Nike trying to right the ship?
Earlier this month, Nike announced that it is moving on from the metaverse and shutting down the RTFKT operation. I think this is a necessary move and makes complete sense. Ultimately, becoming involved with NFTs and digital goods was a distraction that further alienated Nike’s core customers who prefer higher-quality shoes and clothing.
Another big change that Nike made (and one that I predicted) is that it replaced its CEO John Donahoe. Again, this decision makes a lot of sense. Donahoe has spent his entire career in the technology field; simply put, he was likely not the best fit for Nike to begin with. The decision to change its distribution network in favor of a more e-commerce-centric strategy ultimately backfired and paved the way for competing shoe brands to eat into Nike’s market share.
In addition to cleaning up from an operational and managerial perspective, Nike now also has the luxury of working alongside Bill Ackman. Ackman is the CEO of hedge fund Pershing Square Capital Management and is known to be an activist investor. And while activists may not always have the most positive reputations, I’d encourage you to take a look at Ackman’s track record when it comes to turnaround opportunities.
Two of Ackman’s more notable success stories in the consumer industry stem from Chipotle Mexican Grill and Wendy’s. During Ackman’s time as an investor in Wendy’s, the company completed a successful spin-off of subsidiary Tim Hortons, while Chipotle (in which Pershing Square still owns a position) replaced its CEO and subsequently entered a new phase of transformative growth.
Image source: Getty Images.
Is Nike stock a buy?
Considering Nike’s price-to-earnings (P/E) multiple of 22 is hovering near a 10-year low, I’d say investors have largely soured on the stock and moved on. While this lack of investor enthusiasm may be warranted, I think the company isn’t getting enough credit for the changes it’s making in order to right the ship going into 2025.
NKE PE Ratio data by YCharts
While there is some degree of speculation with an investment in Nike, I remain optimistic over its prospects. I think the stock is a bargain at its current valuation, and I think scooping up shares heading into 2025 and holding through the turnaround phase could prove to be a lucrative decision in the long run.
Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Nike. The Motley Fool recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
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