Shares of Nike Inc. (NYSE:NKE) have decreased nearly 36% year to date. The stock is also trading 39% off of its 52-week high, placing the company firmly in bear market territory.
The decline in value can be attributed both to company-specific issues as well as the market-wide sell-off that has taken place.
There is a lot to like about Nike, including its current share price relative to its intrinsic value. For those with a long-term horizon, this could be a good opportunity to acquire shares of the company at a reduced price.
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NKE 15-Year Financial Data
The intrinsic value of NKE
Peter Lynch Chart of NKE
On March 21, Nike reported third-quarter 2022 results for the period ending Feb. 28. Revenue grew 5% to $10.9 billion, coming in $262 million ahead of what Wall Street analysts had anticipated. Currency exchange negatively impacted results by 3%.
Adjusted earnings per share of 87 cents compared unfavorably to 90 cents in the prior year, but topped estimates by 15 cents.
The company saw growth in most areas of its business. Nike Brand revenue improved 6% to $10.9 billion, with currency exchange acting as a 2% headwind to results. North America was higher by 9% due to strength in apparel and equipment. Footwear, the largest business within this region, was up 6%. Europe, the Middle East and Africa improved 7%, driven by 21% gains in both apparel and equipment. Asia Pacific & Latin America grew 11% due to double-digit improvements in footwear and equipment.
Greater China sales fell 5% as an increase in equipment was more than offset by weakness in footwear and apparel. This region suffered from forced governmental lockdowns related to surges in Covid-19 cases.
Much of the gains seen in the quarter were related to Nikes Direct and Digital business. Nike Direct grew 15% to $4.6 billion, representing 42% of total sales. Nike Brand Digital was higher by 19%, with North America registering 33% growth.
Wrapping up the quarter, the gross margin improved 100 basis points to 46.6%. Nike repurchased 8.1 million shares of stock at an average price of $148. Inventories grew 15% to $7.7 billion.
Nike is expected to earn $3.74 per share in fiscal year 2022, which would be a 5% increase from the prior year.
Overall, Nikes business performed pretty well during the quarter. Most regions and product lines saw growth.
There were a few hairs on the report, however.
First, selling, general and administrative costs did increase 13% to $3.4 billion. The majority of expenses had to do with higher employee wages and freight and transportation costs. This is something the company probably cannot do too much about in the short term given inflationary pressures and a tight labor market.
A smaller portion of the SG&A increase was related to advertising budgets, which continue to normalize following the worst of the pandemic. Nike had also made investments into its digital business, but that has paid off based on the growth the company has experienced in this channel. Management said sales through the Nike app were up more than 50% year over year. The app also accounted for the highest share of digital demand, replacing Nike.com as the top performer.
The decline in China was due to Covid-19 resurgence in certain areas of the country that have led to strict lockdowns, which have impacted many businesses. China is one of the most important areas of growth for Nike and contributed nearly 20% of revenue during the quarter. A slowdown here is a material headwind and something that should be monitored in future quarters.
That being the case, there were a few positives for the region, most notably that promotional pricing was reduced. Nikes digital presence in China remains an area of focus as well as this channel has proven to be very beneficial.
The good news is that, even with higher costs and weakness in China, Nikes gross margin still expanded 100 basis points. The company saw fewer markdowns in products, which helped drive full-price sales mix up compared to the previous year. This is a very positive sign that Nikes products remain in high demand and that the company has, so far, overcome an increase in operating costs.
Normally, a double-digit increase in inventory would give me pause because this would mean the company needs to increase promotional pricing for products, but this is not the case for Nike. The company stated that lower pricing was less of an occurrence in the quarter compared to the prior year. The 15% increase in inventory was mostly due to ongoing supply chain disruptions, resulting in longer lead times.
Nike closed Friday at $108.63, implying a forward price-earnings ratio of 29 using analysts estimates for the year. Excluding the extremely high valuation for 2020 due to the pandemic, shares have traded with an average price-earnings ratio of 25.6 over the past decade.
The company is expected to see growth compared to last fiscal year, but the expected rate is far below the 10-year and five-year compound annual growth rates of 13% and 9%. For a stock trading with a multiple north of 33 at the time of the earnings release, 5% earnings growth is going to disappoint investors.
Looking out into fiscal year 2023, analysts appear to believe the short-term headwinds are likely to subside for the company as Nike is expected to earn $4.61. That would be a 23% increase from what the company is projected to earn this fiscal year. Nike is trading at less than 24 times next years earnings estimates and below the long-term average multiple.
Of course, these estimates come with the caveat that Covid-19-related lockdowns in China wont be as pervasive as they are currently and expenses will begin to level off. Still, its a good sign that those following the company believe Nike should return to high growth as soon as next fiscal year, which begins June 1.
At the same time, the GF Value chart shows Nike to be trading well below its intrinsic value as calculated by GuruFocus.
Nike has a GF Value of $139.06, giving the stock a price-to-GF Value ratio of 0.78. Reaching the GF Value would result in a 28% increase from current levels. Nike receives a modestly undervalued rating from GuruFocus. Add in Nikes dividend, and total returns could extend to nearly 30%.
Nike has one of the most recognizable brands in the world, giving it an edge over most peers. Much of the data in the quarter shows a company performing at a very high level, with multiple levers of growth aiding results.
Higher expenses and weakness in its most important growth market have contributed to the deep declines in the stock price.
Earnings growth for the current fiscal year is lackluster given Nikes history. Overall performance and expectations for fiscal year 2023 lend to a more bullish view on the company.
Thanks to the sell-off, Nike is now trading below its long-term historical valuation using next years estimates. The stock is also well below its intrinsic value and could produce high rates of return for those buying the stock today.
Investors who have been looking for a quality company trading at a discount might find Nike much more attractively priced than they did just a few months ago.
This article first appeared on GuruFocus.