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Previously we talked about how luxury stocks such as LVMH and Hermes were running up together with China stocks. But Nike, which is supposed to be the branded sportswear, ran the other direction. Following its disappointing results, Nike stock dropped 7% yesterday.
Nike’s exposure to China is significant, with $502 million in revenue from the region in the last quarter, accounting for almost 30% of Nike’s overall revenue (excluding Converse). Despite this, Nike’s stock has not benefited from the recent rally in Chinese stocks. In fact, its revenue has declined across all geographic regions, with North America, Europe, the Middle East, and Africa experiencing double-digit percentage drops.
In terms of product categories, both footwear and apparel saw declines of 10% and 9%, respectively. The only bright spot was the Equipment segment (bags, balls, bands, etc.), which registered a 15% growth—but that’s mainly due to its lower base revenue.
Nike is facing increasing competition in both its footwear and apparel segments. Adidas, its long-time rival, reported better results for the quarter ending June 2024, with a 9% year-over-year revenue increase.
In footwear, Nike is feeling the pressure from newer competitors like HOKA and On. Deckers, the owner of HOKA, reported a 22% year-over-year revenue growth for the quarter ending in June 2024, with HOKA alone growing 30%. Similarly, On reported a 28% rise in sales for the same period. Together, HOKA and On’s combined revenue of $1,213 million represents about 16% of Nike’s footwear revenue, as they steadily chip away at Nike’s market share.
In the apparel space, Lululemon is a formidable competitor. Lulu’s revenue for the last quarter was $2,371 million, about 78% of Nike’s apparel revenue. While Lululemon grew its revenue by 7% year-over-year in the quarter ending July 2024, its growth in North America slowed to just 1%, with China driving most of its gains. Despite China’s economic recovery, Lululemon’s stock price has not benefited much from its exposure to the region.
The share price performance of these companies reflects their market position. HOKA and On shares are up over 40% year-to-date, while Adidas has bounced back from a slump, with its stock up 30% year-to-date. Lululemon, on the other hand, has performed worse than Nike, with its stock nearly halving. This is largely due to its previously high valuation, driven by high growth expectations, which has now been revised downward as revenue growth slows. Nike’s stock has also struggled, falling 22% this year—a significant decline for a market leader and blue-chip stock.
In response to these challenges, Nike has decided to shake things up by replacing its CEO. Elliott Hill, a 32-year Nike veteran, will take over from John Donahue as President and CEO on October 14, 2024. While new leadership often signals a fresh direction, it’s important to note that a change in CEO alone is not a cure-all, and it will take time to see if new strategies are effective.
As for the stock, while Nike may seem undervalued, it’s still too early to buy. The stock price is continuing to decline, and what seems low can go lower. Case in point: I mentioned Nike being undervalued earlier this year when the price was near $100, yet it has only gotten cheaper, with no rebound in sight.
A smarter approach would be to avoid catching a falling knife. Let the stock fall until it stabilizes and trades within a range for a while—that’s when you know it has likely bottomed out. Right now, Nike’s stock is still trending downward, so the bottom hasn’t formed yet. It’s a worthy stock, but the time to buy hasn’t arrived.
