World Stock Watch

Nike’s Turnaround Efforts: A Promising Dividend Growth Stock?

Fiscal 2025’s Second-Quarter Results: A Mixed Bag

Nike’s latest quarterly results, announced on December 19, beat top- and bottom-line estimates, albeit with low expectations. Despite this, the stock fell slightly on December 20, as investors digested the company’s guidance and recovery timeline. With a 23-year streak of increasing dividends and a current yield of 2.1%, Nike remains an attractive option for passive income investors who believe in its turnaround story.

Challenges Ahead: Distribution Model and Competition

Nike’s decision to expand its direct-to-consumer (DTC) business, Nike Direct, aimed to increase margins, build consumer relationships, and improve promotional effectiveness. However, this strategy has damaged its wholesale business, leaving the company overexpanded and vulnerable to slowdowns. Additionally, Nike faces strong competition from Lululemon Athletica, Deckers Outdoor-owned Hoka, and On Holding, which don’t have the same legacy dependence on wholesale.

Guidance and Near-Term Outlook

Management’s forecast for a weak second half of the fiscal year, coupled with plans to slash prices and reduce inventory, suggests a challenging near-term outlook. New CEO Elliott Hill aims to refocus on footwear, but margins will likely take a hit due to inventory reduction. The turnaround will likely take longer than expected, and near-term results will be weak.

Long-Term Potential and Dividend Incentive

Despite the challenges, Nike’s stock may be worth buying for long-term investors willing to hold for at least five years. The dividend yield of 2.1% is higher than the S&P 500 average, and the company has consistently raised its dividend in recent years. If Nike successfully navigates its turnaround, the stock could become very attractive in the future, especially if China recovers.

Investor Takeaway

Investors confident in the Nike brand and willing to wait for a turnaround may consider buying the stock now and collecting passive income. However, those who are skeptical may want to keep Nike on a watch list and monitor its response to potential challenges.