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One of the most 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 with the S&P 500The return of 84% over the last half decade.
The deadline for current year's ISA contributions is midnight April 5. Is this an opportunity to buy more shares before then? Or should I sell it and keep running? Let's discuss.
Amazing brand
The word “iconic” gets thrown around a lot, but to me Nike is clearly one of those brands.
I wore Nike sneakers decades ago. However, she still couldn't walk five minutes today without seeing that famous swoosh on a piece of fabric.
CougarEllesse, Reebok and others may rise and fall in popularity, but Nike has remained on top.
Additionally, the company still appears to have plenty of opportunity to increase sales in Asia and Latin America, where the rising middle classes have more to spend on premium sportswear.
Innovation issues
However, there is a drawback. Critics argue that the company is too reliant on legacy products like basketball shoes and has stopped innovating.
On Nike's third-quarter earnings conference call on March 21, CEO John Donahoe admitted as much: “We need to make adjustments…we need to drive a continuous flow of new product innovation.“.
Meanwhile, it is losing market share to newer brands like Hoka and On Running, as well as New Balance, which has increased in popularity.
Additionally, the company has recently made headlines for its redesign of the St George's cross on England's new football kit. Even the Prime Minister got involved in the dispute.
Here it seems that there was a little too much Product innovation for some people's taste!
While this storm should pass quickly, the possibility that Nike has lost its advantage is now a concern for me.
Lukewarm growth prospects
In the third quarter, which ended February 29, the company reported $12.43 billion in revenue, up 1% year-over-year.
Net income of $1.17 billion translated into earnings per share (EPS) of $0.77 per share. That was down from $0.79 a year earlier, although it would have been $0.98 if not for the restructuring charges.
Basically, Nike is cutting costs to preserve profits and margins, but the lack of growth has become a problem. Sales in China are slow. Even the management admitted that the company “is not performing to our potential”.
Looking ahead, Nike expects a single-digit revenue decline in the first half of FY25 (which begins in June). This reflects weak global consumer sentiment. So there's not much to get excited about.
my movement
If the stock were to drop into the 15-18 price-earnings range, I would consider buying more shares. After all, this is still a world-class company.
However, Nike trades at 27 times earnings. This is a growth multiple for a company that has virtually stopped its revenue growth (at least for now). And that worries me.
Of course, 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 more than 5% right now.
On second thought, I'm putting the action in the penalty box. I will wait for the fourth quarter results in June and then I will make a decision.
