The company's multiyear innovation cycle has been mainly focused on increasing its speed to the consumer. For years, NIKE has used the Express Lane to facilitate short-lead-time replenishment and hyperlocal design, and it expects to continue leveraging this. However, in the past year, NIKE has developed a new approach across the entire product creation process. This is called the Speed Lane, a broader company-wide effort to move faster and be more responsive to the consumer. In the second half of fiscal 2025, the company expects to see additional innovations to be launched from Speed Lane, including several exciting new franchises in fitness and lifestyle.
Trump Tariff Impact
With import taxes ranging from 32% to 54%, the US has some of the highest rates in the world on goods from China, Vietnam, and Indonesia. Nike shares have rebounded following a fruitful call with the leader of Vietnam, and President Trump has indicated interest in negotiating these rates lower. The majority of analysts, however, believe that Nike will need to raise its prices. Swiss bank UBS estimates that the cost of goods from Vietnam, where Nike makes half of its shoes, will rise by 10% to 12%. Nearly all of Nike's trainers are made in China and Indonesia.The industry will come to the realization that price increases are the only viable medium-term solution to lessen the impact. Similar difficulties will be faced by Nike and other western brands like H&M, Adidas, Gap, and Lululemon. With selling and administrative costs accounting for a third of its revenue, Nike's gross profit margin of more than 40% is already low. When interest and taxes are taken into account, Nike's profit margin for all of its products has decreased to roughly 11%.
Tariff Scenario Analysis
In the short run it is unreasonable to believe there would be any significant impact on the demand and sales due to a 10%-20% price hike for Nike's products especially when its premium brand image is considered. The table below extracts the FY 2024 figures for North America and embeds different tariff scenarios and price hikes to analyze the impact on revenue and EBITDA for the North American market.
Despite the challenges NIKE remains committed to drive the growth of sports in China.
Competition
Nike is a well-known sportswear company with 6,000 franchisee-operated stores and more than 190 stores across 190 countries. Nike had 16% of the $407 billion global sports footwear market in 2024, almost twice as much as Adidas, which came in second. It had a 15% market share in North America, more than Adidas' 5% and Lululemon's 4%. Nike held a dominant 17% market share in Western Europe, five percentage points ahead of Adidas' 4%. Nike is anticipated to hold onto its top spots despite the fiercely competitive markets because of its inventiveness, sponsorships, advertising, and well-liked products.
Nike spends more than $500 million a year, or roughly 1% of its sales, on research and development. Competitors like Adidas and Puma have smaller revenue bases despite their high investment; in 2024, Adidas spent EUR 170 million, while Puma spent EUR 92 million. Since Nike is a well-known sportswear company, its sponsorship cost advantage is neither substantial nor sustainable. Although endorsements help establish a brand, it is challenging to measure their impact on profit margins. Since the majority of Nike's production is outsourced to factories that supply other sportswear companies, the company also has little advantage when it comes to acquiring raw materials and other expenses. One of Nike's biggest suppliers, Shenzhou International, also manufactures clothing for Adidas, Puma, and other brands.
Nike's position is increasingly fraught with challenges in China as the most formidable contenders are home-bred like Anta and Li-Ning. These two brands use their inherent regional knowledge to introduce items that reflect Chinese preferences such as basketball, running, or athleisureat times, they offer them at more affordable rates. The companies' witty online advertisements, the prowess of e-commerce, and the strategic alliances with local influencers that they foster have increased their brand equity and stretched their market share. Anta's procurement of the Fila label and the sponsorship of the Olympics show that the company is adopting a more global outlook, while Li-Ning's designs of streetwear that speak to the youth culture connect well with the consumers of that demographic. As a sense of national pride takes root, Nike must also continually go through innovation of its product offer, alteration of its marketing pricing strategies and form connections with the local people to continue being the leaders who are environmentally friendly.
Bull Case
Long-Term Playbook: Despite the ongoing challenges, management is on track with its actions to reposition NIKE to be more competitive, and drive sustainable, profitable long-term growth. The company is intensifying its focus on sports, speeding up the introduction and expansion of new products and innovations. NKE is also enhancing its storytelling efforts with greater impact and boldness while elevating the overall marketplace to strengthen brand distinction and align with consumer preferences. Additionally, the company is accelerating its innovation pipeline, advancing several innovations. It is taking bold steps to reclaim its leading edge in innovation. Focus on its sports performance product category has been the key to its strategy.
Strategic Actions on Track: Elliott has laid out a series of strategic actions to reposition the business and revitalize the momentum of the NIKE brand through sport. Some of these initiatives are already in progress, and the company is accelerating implementation while others are newly introduced. Notably, NIKE is transitioning its digital platform to a full-price model and reducing the reliance on promotional activity. Concurrently, the company is scaling back its investment in performance marketing, which will reduce paid traffic.
Plans for NIKE Digital: CEO Elliot noted that traffic in NIKE Direct, both online and in physical stores, has declined due to a lack of product innovation and inspiring narratives. This has led to an over-reliance on promotions. The company has shifted to a pushed model, with digital platforms showing a near 50-50 split between full-price and promotional sales at the start of fiscal 2025. NIKE Digital has been capturing demand, but competing with wholesale partners instead of creating new demand for its brands. As a result, the company is refocusing on enhancing the consumer experience, growing organic traffic, and driving full-price sales, as outlined by Elliot. Being a premium brand means focusing on full-price sales, with promotions limited to key retail periods rather than the current frequency. Additionally, NKE will explore using NIKE value stores to clear excess inventory.
Strong Financials & Sustained Shareholder Returns: NIKE ended second-quarter fiscal 2025 with strong liquidity, which included cash and short-term investments of $9.8 billion. Its long-term debt of $7.97 billion was almost flat from the prior quarter. For the past 14 years, the company has distributed regular dividends and made share repurchases to improve shareholder returns. In second-quarter fiscal 2025, the company returned $1.6 billion to shareholders, including $1.1 billion in share repurchases and $557 million in dividends. As of Nov. 30, NIKE repurchased 112.8 million shares for $11.3 billion as part of its four-year $18-billion share repurchase program approved in June 2022. NIKE has a dividend payout ratio of 38%, annualized dividend yield of 2.2% and free cash flow yield of 5.2%.
Bear Case
Frothy Valuation: Considering price-to-earnings (P/E) ratio, NIKE looks overvalued compared with the industry. The stock has a trailing 12-month P/E ratio of 32.86X, which is above the median level of 25.97X but below the high level of 36.15X, scaled in the past year. On the contrary, the trailing 12-month P/E ratio is 26.17X for the industry. Given these factors, we believe that the stock is quite stretched from the P/E aspect.
Franchise Management Actions: NKE has experienced sluggish sales trends in its lifestyle segment, including men's, women's, and Jordan. As outlined in first-quarter fiscal 2025, the company is progressing with its plans to adjust timelines and reduce the overall supply of select classic footwear franchises across various channels. NIKE is focused on recalibrating these franchises within NIKE Digital, where they hold the largest share of business. However, these strategic actions are expected to impact certain business aspects, creating short-term revenue headwinds in fiscal 2025. In the second quarter of fiscal 2025, the company advanced its efforts to shift its product portfolio by reducing reliance on its classic footwear franchises. These franchises continued to decline at a rate faster than the overall business, with a more pronounced slowdown compared to the first quarter.
As a result, the company's second-quarter fiscal 2025 sales were impacted by ongoing headwinds from its franchise management actions, which led to year-over-year revenue declines of 8% on a reported basis and 9% on a currency-neutral basis. The company continues to see significant reductions in its classic footwear franchises through NIKE Direct, which declined 13% on a reported basis and 14% on a currency-neutral basis, including a 21% drop in NIKE Digital and a 2% decrease in NIKE Stores. Wholesale also experienced a 3% decline year over year on a reported basis and 4% decline on a currency-neutral basis. Marketplace trends in the fiscal second quarter mirrored the challenges previously highlighted, as traffic and retail sales fell short of expectations, particularly in September and October. However, November brought a positive shift, with digital and in-store traffic gaining momentum, especially during key consumer events such as Black Friday week, signaling improved performance in critical periods.
Jeopardy of the Chinese market: NIKE's business in Greater China has been a focal point for its global strategy, reflecting significant opportunities and challenges. Recent trends reveal that the company has been experiencing considerable shifts in consumer traffic in Greater China, with declines in brick-and-mortar traffic and lower sell-through rates. Driven by retail traffic declines in a difficult macro environment, revenues in Greater China declined 11% year over year in second-quarter fiscal 2025. NIKE Direct channel revenues in Greater China declined 7%, including an 8% decline in NIKE stores and a 4% decline in NIKE Digital. Wholesale in the region was down 15% year over year. The company also required higher markdown activity to drive sell-through and inventory velocity, negatively impacting gross margins. EBIT in Greater China declined 27% on a reported basis.
Amid a competitive landscape, NIKE remains committed to delivering product innovation, inspiring consumers, and driving the growth of sports in China. The company continues to experience strong demand for full-price products, supported by reduced markdowns and higher margins on locally designed express lane offerings. While management anticipates near-term challenges, it highlights the ongoing growth of sports in China. NIKE is actively addressing current headwinds in the region to restore brand momentum and maintain a healthy marketplace.
Multiples
Despite the challenges NIKE remains committed to drive the growth of sports in China.
Nike is in a marvelous, premium valuation segment; the company is supervising its market-leading position along with the growth expectations that are fulfilled in a disciplined manner. The company's forward non-GAAP P/E of ~29.5 is considerably high in comparison to Skechers (17) and Crocs (99.5). At the same time, this number is lower than On's staggering ~42, which indicates that the investors value Nike's scale but do not anticipate extraordinary growth of the brand. In the course of two and three years from now, the company's FY3 P/E is expected to be ~22.6 which means only a little reversion as the earnings align with the price of today.
Nike's trailing Price/Sales at nearly 1.95 is double Skechers and about half of On or Birkenstockproving good top-line pricing power without propensity to bubble. Similarly, its EV/Sales (~2.0) and EV/EBITDA (FWD ~21.7; TTM ~16.2) suggests that the market anticipates strong future earnings growth. This could be driven by expectations of improving profit margins, where the company retains more profit per dollar of revenue, or by other factors like revenue expansion,even though they are still lower than On's projected EV/EBITDA of ~26.5.
Two main warning signs are raised: PEG (forward non-GAAP) being at an extremely high 11.2 as compared to others (Deckers ~1.4; Birkenstock ~1.0) is indicative of lower expected earnings growth versus the current valuation, and its Price/Book (6.6) and Price/Cash-Flow (~15.8) are among the highest in the group. In a nutshell, Nike's multiples provide an illustration of a blue-chip franchise with the brand offering stability and margin strength for investors to consider making balance on that safety with today's muted growth prospects included in the price they pay.
DCF
Despite the challenges NIKE remains committed to drive the growth of sports in China.
Based on the EPS (without non-recurring items) conduced DCF prepared by Gurufocus, the stock is overvalued by 17.68% with a price target of $46.33. This seems quite obscure in my opinion as Nike has generated more free cash flow over the past five years than its closets competitors. Additionally, EPS(without NRI) is up 10.65% past five years, higher than its peers over the same period. This also contradicts with the positions taken by some of the gurus on this stock.
Guru Trades
Despite the challenges NIKE remains committed to drive the growth of sports in China.
For an activist investor like Bill Ackman (Trades, Portfolio), a stable and predictable organic generation of cash flow is the first box that a company needs to be tick. And Nike has remarkably done so. Not only Nike's free cash flow has grown 10.65% over the past five years but the dividends are also up 8% over the same period.And hence despite the short term risks pertaining to tariffs, Nike is still a lucrative option for activist investors like Bill Ackman (Trades, Portfolio)
Conclusion
According to Nike's third-quarter fiscal 2025 outlook, Elliott's actions and foreign exchange headwinds will cause a low-double-digit revenue decline. The company anticipates a slight decline in SG&A expenses and a 300350 basis point drop in the gross margin year over year. Between $30 million and $40 million is the estimated range for other revenue and expenses, including net interest income. It is anticipated that the gross margin will drop 300 basis points to 41.8%, while SG&A expenses will drop 2.6% year over year to $4.1 billion. In the fiscal third quarter, SG&A expenses are anticipated to rise by 290 basis points to 36.9%.
