Despite economic uncertainties, the athletic industry is well-positioned for growth. Increased interest in sports and fitness activities worldwide and the significant influence of fashion and lifestyle trends on athletic wear are driving the industry’s prospects.
However, not all stocks are well-positioned to capitalize on the industry tailwinds. While I think NIKE, Inc. (NKE) is a great watchlist addition, Foot Locker, Inc. (FL) is best avoided now.
Before explaining what influences my view on these stocks, let’s discuss what’s shaping the athletic industry’s prospects.
The athletic industry is thriving as sports apparel, initially designed for athletes, is now popular among gym-goers and non-athletes. This growth is fuelled by heightened health awareness, increased fitness activities, greater women's participation in sports, celebrity endorsements, and improved living standards in emerging markets.
This increase in global interest in sports and fitness is boosting demand for athletic footwear, particularly specialized shoes for activities like running and walking. Moreover, due to fashion trends, sneakers and sports shoes have become popular style choices beyond athletic use. Consequently, the global athletic footwear market is expected to reach $189.80 billion by 2028, growing at a CAGR of 4.3%.
It is noteworthy that the global fitness and recreational sports centers market is growing due to increased obesity resulting from sedentary lifestyles and unhealthy diets. With a heightened awareness of fitness benefits, IMARC Group expects the market to reach $153.0 billion by 2028, growing at a 4.9% CAGR.
Furthermore, the sports apparel market is estimated to reach $410.8 billion by 2032, growing at a CAGR of 6%.
Despite these conducive trends, the two Athletics & Recreation stocks featured in this article may not be the best investment choices. Let’s discuss their fundamentals in detail.
Stock to Sell:
Foot Locker, Inc. (FL)
FL operates as a footwear and apparel retailer in North America, Europe, Australia, New Zealand, Asia, and the Middle East. Its brand portfolio includes Foot Locker, Kids Foot Locker, and Champs Sports.
In terms of the trailing-12-month Capex/Sales, FL’s 2.82% is 10.4% lower than the 3.14% industry average. Likewise, its 30.01% trailing-12-month gross profit margin is 15.8% lower than the industry average of 35.65%. Additionally, the stock’s 4.44% trailing-12-month EBIT margin is 40% lower than the industry average of 7.40%.
For the fiscal second quarter that ended July 29, 2023, FL’s total revenue declined 9.9% year-over-year to $1.86 billion. Its income from operations decreased 99.3% year-over-year to $1 million. In addition, its net loss attributable to FL and EPS came in at $5 million and $0.05.
Street expects FL’s EPS and revenue for the quarter ended October 31, 2023, to decrease 81.8% and 9.6% year-over-year to $0.23 and $1.96 billion, respectively. Over the past nine months, the stock has declined 49.8% to close the last trading session at $22.17.
FL’s grim prospects are reflected in its POWR Ratings. It has an overall D rating, which translates to a Sell in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #35 out of 36 stocks in the Athletics & Recreation industry. It has an F grade for Growth and Sentiment and a D for Stability and Quality. Click here to see FL’s ratings for Value and Momentum.
Stock to Watch:
NIKE, Inc. (NKE)
NKE designs, develops, markets, and sells athletic footwear, apparel, equipment, accessories, and services worldwide. The company provides athletic and casual footwear, apparel, and accessories under the Jumpman trademark; and casual sneakers, apparel, and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron, and Jack Purcell trademarks.
On November 17, 2023, NKE announced a 10-year contract extension with Football Australia, marking Australia's longest-standing federation and club partnership. The extended partnership supports elite national teams and is committed to grassroots participation, inclusivity programs, and Football Australia’s Legacy '23 strategy.
On November 5, 2023, NKE announced the Nike G.T. Cut 3, incorporating Nike ZoomX Foam for the first time in a basketball shoe. Designed to enhance speed and separation, the shoe features a lower-to-the-ground court feel and is lighter than its predecessor. The G.T. Cut franchise also introduces the lower-priced G.T. Cut Academy, focusing on comfort, traction, and style.
In terms of the trailing-12-month EBIT margin, NKE’s 11.32% is 52.8% higher than the 7.40% industry average. Likewise, its 9.82% trailing-12-month net income margin is 123.3% lower than the industry average of 4.40%. However, the stock’s 1.86% trailing-12-month Capex/Sales is 40.8% lower than the industry average of 3.14%.
NKE’s revenues for the fiscal first quarter ended August 31, 2023, increased 2% year-over-year to $12.94 billion. Its gross profit increased 1.9% year-over-year to $5.72 billion. The company’s EPS rose 1.1% over the prior-year quarter to $0.94. However, its net income declined 1.2% year-over-year to $1.45 billion.
Analysts expect NKE’s revenue for the quarter ending November 30, 2023, to increase 0.8% year-over-year to $13.42 billion. However, its revenue for the same quarter is expected to decrease 1% year-over-year to $0.84. It surpassed the Street EPS estimates in three of the trailing quarters. Over the past nine months, the stock has declined 15.1% to close the last trading session at $105.96.
NKE’s bleak fundamentals are reflected in its POWR Ratings. It has an overall rating of C, equating to a Neutral in our proprietary rating system. It has a C grade for Momentum and Stability. Within the same industry, it is ranked #14.
In total, we rate NKE on eight different levels. Beyond what we stated above, we also have given NKE grades for Growth, Value, Sentiment, and Quality. Get all the NKE ratings here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
NKE shares rose $0.23 (+0.22%) in premarket trading Monday. Year-to-date, NKE has declined -8.58%, versus a 19.18% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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