Nike(NYSE: NE) reported its results for the second quarter of fiscal 2025. on December 19, beating top line and bottom line estimates (although expectations were very low). However, shares fell slightly on Dec. 20, despite rising 1.1% in S&P 500 as investors digested Nike’s guidance and timeline for its recovery.
The company has increased its dividend for 23 consecutive years and currently yields 2.1%, making it an intriguing option for passive income investors who believe in its turnaround story. Here’s what you need to know about Nike and whether dividend stock worth buying now.
Image source: Getty Images.
Nike shares have risen just under 20% over the past nine years despite an impressive 196% gain in the S&P 500. Shares briefly hit an all-time high in 2021, but that was an overreaction to the cost spike caused by COVID.
The company faced several challenges, the biggest being its distribution model. In 2017 decided to grow its direct-to-consumer (DTC) business under the Nike Direct brand to become less dependent on wholesalers who act as intermediaries between consumers and Nike.
The strategy had the potential to increase Nike’s margins, build relationships directly with consumers and improve the effectiveness of its promotions. A company can better personalize its marketing efforts by having a better understanding of buyer behavior and preferences. Consider the “you may also like” prompt on a streaming service or online shopping website.
Besides expanding DTC through Nike Direct, the company also wanted to expand its apparel business to become less dependent on footwear. Finally, Nike has made a big push internationally, namely in China.
In retrospect, none of these ideas were particularly bad, they just left the company overstretched and vulnerable to slowdown. Nike Direct is doing decently well, but it has hurt the company’s wholesale business. China has been in decline for many companies, not just Nike.
The company is facing increasingly strong competition from Lululemon Athletics and others on the clothing side, and Outdoor decks-owned by Hoka and In detention mainly on the footwear side (although these brands also offer clothing). These native DTC companies don’t have the legacy reliance on wholesale, making them perhaps more nimble than Nike.
In the most recent quarter, sales declined across its footwear and apparel geographies, both Nike Direct and wholesale. So the whole business is going badly. Management did not grant a reprieve. Management forecasts a weak second half of its fiscal year as it cuts product prices to reduce inventories and strengthen its product portfolio.
The new chief executive, Elliott Hill, said he hoped to return Nike “to winning ways” by focusing more on its roots in footwear. Meanwhile, margins are likely to take a huge hit due to destocking.
The key takeaway from last quarter and earnings call commentary was that the company’s recovery will take longer than expected and near-term results will be weak. There is also the possibility that the turnaround will be further delayed if interest rates remain higher for longer.
The Federal Reserve’s comments on Dec. 18 indicated that this could slow the pace of interest rate cuts, which could limit consumer spending on discretionary goods. If the new administration goes ahead with the tariffs, Nike’s margins could be further squeezed.
As you can see in the chart, Nike’s sales are falling from record highs and its operating margins are at their lowest levels in a decade (if you exclude the brief dip caused by the pandemic). In short, Nike is already in a vulnerable position and is not well positioned to deal with these potential challenges.
The stock is probably worth buying, but only if you’re willing to hold it for at least five years. Short-term risks and potential gains don’t look good as much needs to go right for Nike to show improvements, while external factors such as higher interest rates and tariffs could compound matters.
There’s no denying, however, that the more stocks fall, the more attractive they become to long-term investors. Nike doesn’t look so cheap now because its earnings are expected to decline in the near future. However, it can start to look very cheap once it works through reducing its inventory. In a few years, it wouldn’t be surprising to see a successful turnaround after Nike, especially if China recovers.
The dividend is an incentive to hold the shares during this period. The 2.1% yield was higher than the S&P 500 average of 1.2%. It’s also worth mentioning that even though Nike’s business isn’t performing that well, it has still managed to raise its dividend by a significant amount in recent years.
The last five annual increases were 8%, 9%, 11%, 11% and 12%. I would expect future increases to be in the high single digits. But still, Nike has gone from a historically growth-oriented company to a viable passive income play.
In short, investors who are confident in the brand and don’t mind waiting for a turnaround could consider buying the stock now and sit back and collect passive income. But people who are skeptical may want to keep Nike on the watch list and see how the company responds to potential challenges.
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Daniel Folber has positions in Nike and has the following options: long calls for January 2025 $70 on Nike. The Motley Fool has positions and recommends Deckers Outdoor, Lululemon Athletica and Nike. The Motley Fool recommends On Holding. The Motley Fool has a disclosure policy.
