Fed’s commitment to control inflation is taking a toll on consumer spending, impacting the recreation industry’s demand. Therefore, I think this is not the right time to invest in NIKE, Inc. (NKE) and Foot Locker, Inc. (FL).
The rise in obesity rates due to sedentary lifestyles and high-calorie diets, coupled with growing awareness of fitness benefits, is driving the growth of the Fitness and Recreational Sports Centers Market.
IMARC Group expects the global fitness and recreational sports centers market to reach $153.0 billion by 2028, exhibiting a CAGR of 4.9% until 2028.
On the other hand, in April 2023, prices had increased by 4.9% compared to April 2022, according to the 12-month percentage change in the Consumer Price Index, the monthly inflation rate for goods and services in the United States.
Inflation is still far from the Fed’s target rate of 2%, which might prompt the Fed to hike rates further.
Moreover, the economy saw a string of the biggest bank failures since the 2008-09 financial crisis, which had everyone from Federal Reserve staff economists to major banking CEOs talking about rising recession risks. Growing recessionary fear has dampened the consumer demand.
Stock to Hold:
NIKE, Inc. (NKE)
NKE designs, develops, markets, and sells men’s, women’s, and kids athletic footwear, apparel, equipment, and accessories worldwide.
On April 25, 2023, Cognizant Technology Solutions Corp. (CTSH) announced a new agreement to transform and support the technology operations of NKE, the world’s leading designer, marketer, and distributor of authentic athletic footwear, apparel, equipment, and accessories.
On May 4, NKE declared a quarterly dividend of $0.34, payable on July 5, 2023. The company pays an annual dividend of $1.36, which translates to a yield of 1.26% at the current price level. It has a four-year average dividend yield of 0.92%.
NKE’s forward EV/Sales of 3.29x is 189.8% higher than the industry average of 1.13x. Its forward P/S multiple of 3.25 is 293.8% higher than the industry average of 0.83.
NKE’s revenues increased 14% year-over-year to $12.39 billion in the fiscal first quarter that ended February 28, 2023. Its gross profit increased 6% year-over-year to $5.37 billion. However, its EPS declined 9.2% year-over-year to $0.79 and net income declined 11.2% year-over-year to $1.24 billion.
NKE’s revenue is expected to increase 2.8% year-over-year to $12.57 billion for the fiscal fourth quarter ended May 2023. On the other hand, its EPS is expected to decline 33.6% year-over-year to $0.66 in the same quarter. Also, it has surpassed revenue and EPS estimates in each of the trailing four quarters, which is impressive.
The stock has declined 15.3% over the past month to close the last trading session at $105.20.
The stock has an overall rating of C, which translates to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
NKE also has a C grade for Growth, Stability, Sentiment, and Momentum. It is ranked #10 out of 37 stocks in the Athletics & Recreation industry.
Click here to see the additional POWR Ratings for NKE (Value and Quality).
Stock to Sell:
Foot Locker, Inc. (FL)
FL is a footwear and apparel retailer in North America, Europe, Australia, New Zealand, Asia, and the Middle East.
FL’s forward EV/EBITDA of 10.55x is 11.8% higher than the industry average of 9.44x. Its forward EV/EBIT multiple of 17.62 is 37% higher than the industry average of 12.86.
On May 17, FL declared a quarterly dividend of $0.40, payable on July 28, 2023.
The company pays an annual dividend of $1.60, which translates to a yield of 6.18% at the current price level. It has a four-year average dividend yield of 3.33%.
During the fiscal first quarter that ended April 29, 2023, FL’s total revenue declined 11.3% year-over-year to $1.93 billion. Net income decreased 72.9% year-over-year to $36 million, while its EPS decreased 72.3% year-over-year to $0.38.
FL’s EPS is expected to decline 96.5% year-over-year to $0.04 in the fiscal second quarter ending July 2023. Its revenue is expected to decline 9% year-over-year to $1.88 billion for the same quarter.
The stock has plunged 44.9% over the past three months to close the last trading session at $24.61.
FL’s grim prospects are reflected in its POWR Ratings. The stock has an overall D rating, which translates to a Sell in our POWR Ratings system.
FL also has an F grade for Growth and Sentiment and a D in Momentum and Stability. It is ranked #36 in the same industry.
To access additional FL POWR Ratings for Value and Quality, click here.
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NKE shares were trading at $105.84 per share on Tuesday morning, up $0.64 (+0.61%). Year-to-date, NKE has declined -8.99%, versus a 12.19% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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