Nike's Turnaround Is Underway, but Is the Dividend Growth Stock a Buy Before 2025?

Start Your Mornings Smarter! Wake up with Breakfast news in your inbox every market day. Sign Up For Free »

Nike (NYSE: NKE) reported its fiscal 2025's second-quarter results on Dec. 19, beating top- and bottom-line estimates (although expectations were very low). However, the stock fell slightly on Dec. 20 despite a 1.1% gain in the S&P 500 as investors digested Nike's guidance and the timeline of 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 the dividend stock is worth buying now.

Image source: Getty Images.

Where Nike went wrong

Nike stock is up just under 20% in the past nine years despite a rip-roaring 196% gain in the S&P 500. The stock briefly hit an all-time high in 2021, but that was an overreaction to COVID-induced surges in spending.

The company has run into several challenges, the biggest being its distribution model. In 2017, it decided to grow its direct-to-consumer (DTC) business under the Nike Direct label to become less dependent on wholesalers, which 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 customize its marketing efforts by having more insight into buyer behavior and preferences. Think of 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 grow its apparel business to become less dependent on footwear. Lastly, Nike made a big push internationally, namely into China.

In hindsight, none of these ideas were particularly bad, they just left the company overexpanded and vulnerable to slowdowns. Nike Direct has gone decently well, but it has damaged the company's wholesale business. China has been in a downturn for many companies, not just Nike.

The company faces increasingly strong competition from Lululemon Athletica and others on the apparel side, and Deckers Outdoor-owned Hoka and On Holding mainly on the footwear side (though these brands also offer apparel). These DTC-native companies don't have the legacy dependence on wholesale, making them arguably more flexible than Nike.

In the recent quarter, sales declined across its geographies, in footwear and apparel, and in both Nike Direct and wholesale. So the entire business is doing poorly. Guidance didn't provide a reprieve. Management is forecasting a weak second half of its fiscal year as it slashes prices on products to reduce inventory and strengthen its product pipeline.

Its new CEO, Elliott Hill, has said he hopes to get Nike "back to winning" by focusing more on its roots in footwear. In the meantime, margins will likely take a massive hit due to the inventory reduction.

Nike's abysmal results could get even worse

The key takeaway from the recent quarter and commentary on the earnings call was that the company's turnaround will take longer than expected, and its near-term results will be weak. There's also the possibility that the turnaround gets even more delayed if interest rates stay higher for longer.

Federal Reserve commentary on Dec. 18 indicated that it could slow down the pace of interest rate cuts, which could limit consumer spending on discretionary goods. If the new administration moves forward with tariffs, Nike's margins could be further strained.

NKE data by YCharts; TTM = trailing 12 months.

As you can see in the chart, Nike's sales are dropping from record highs, and its operating margins are at their lowest levels in the past decade (if you exclude the brief pandemic-induced plunge). In sum, Nike is already in a vulnerable place and isn't well-positioned to handle these potential challenges.

Investing in Nike requires patience

The stock is probably worth buying, but only if you're willing to hold it for at least five years. The near-term risks and potential rewards don't look good, as a lot has to go right for Nike to show improvements, whereas external factors like higher interest rates and tariffs could compound its woes.

However, there's no denying that the further the stock falls, the more attractive it becomes for long-term investors. Nike doesn't look that cheap now because its earnings are expected to decrease in the near term. However, it could begin to look very cheap after it works through its inventory reductions. A few years from now, seeing a successful Nike post-turnaround wouldn't be surprising, especially if China recovers.

The dividend is an incentive to hold the stock through this period. A 2.1% yield is higher than the S&P 500 average of 1.2%. It's also worth mentioning that even though Nike's business hasn't been performing that well, it has still managed to raise the dividend by a considerable amount in recent years.

The last five annual raises were 8%, 9%, 11%, 11%, and 12%. I would expect future raises to be in the high-single-digit percentages. But still, Nike has gone from being a historically growth-centered company to a viable passive income play.

In sum, investors who are confident in the brand and don't mind waiting for a turnaround could consider buying the stock now and sitting back and collecting passive income. But folks who are skeptical may want to keep Nike on a watch list and see how the company responds to potential challenges.

Should you invest $1,000 in Nike right now?

Before you buy stock in Nike, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Nike wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $855,971!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of December 23, 2024

Daniel Foelber has positions in Nike and has the following options: long January 2025 $70 calls on Nike. The Motley Fool has positions in and recommends Deckers Outdoor, Lululemon Athletica, and Nike. The Motley Fool recommends On Holding. The Motley Fool has a disclosure policy.