Sticky inflation, aggressive rate hikes by the Fed and turmoil in the US banking sector are paving the way for a recession this year. Therefore, I believe that this is not the right time to invest in Foot Locker (FL) and NIKE (NKE). Read.
The Fed’s commitment to controlling inflation is having an impact on consumer spending, affecting demand from the leisure industry. Therefore, I do not believe this is the right time to invest in NIKE, Inc. (NKE) and Foot Locker, Inc. (FL).
The increase in obesity rates due to a sedentary lifestyle and high-calorie diet, combined with the growing awareness of the benefits of fitness, is driving the growth of the fitness center and leisure sports market.
The IMARC Group expects the global market for fitness centers and recreational sports centers to reach $153.0 billion by 2028. CAGR 4.9% by 2028
In turn, in April 2023 prices increased by 4.9% compared to April 2022, as measured by the 12-month percentage change in the Consumer Price Index, which is the monthly rate of inflation of goods and services in the United States.
Inflation is still far from the Fed’s target rate of 2%, which may prompt the Fed to raise rates further.
Moreover, the economy has seen a string of the biggest bank failures since the financial crisis of 2008-09, talked about by everyone from economists at the Federal Reserve to the CEOs of major banks growing recession risk. The growing fear of a recession has weakened consumer demand.
Actions to hold:
NIKE, Inc. (NKE)
NKE designs, develops, markets and markets men’s, women’s and children’s athletic footwear, apparel, equipment and accessories worldwide.
April 25, 2023 Cognizant Technology Solutions Corp. (CTSH) announced a new agreement to transform and support the technology operations of NKE, a leading global designer, retailer and distributor of authentic athletic footwear, apparel, equipment and accessories.
On May 4, NKE declared a quarterly dividend of USD 0.34, payable on July 5, 2023. The company pays an annual dividend of USD 1.36, which at the current price level translates into a profit of 1.26%. It has a four-year average dividend yield of 0.92%.
NKE’s future EV/sales of 3.29x is 189.8% higher than the industry average of 1.13x. It’s ahead P/S a multiple of 3.25 is 293.8% higher than the industry average of 0.83.
NKE’s revenue increased 14% year-on-year to $12.39 billion in the first fiscal quarter ending Feb. 28, 2023. Its gross profit increased 6% year-on-year to $5.37 billion. However, EPS fell 9.2% year-on-year to $0.79, and net income fell 11.2% year-on-year to $1.24 billion.
NKE revenue is expected to grow 2.8% year-on-year to $12.57 billion in the fiscal fourth quarter ending May 2023. On the other hand, its EPS is expected to fall 33.6% year-on-year to $0.66 in the same quarter. In addition, it exceeded revenue and EPS estimates in each of the last four quarters, which is impressive.
The stock is down 15.3% over the past month to close last trading session at $105.20.
The shares have an overall rating of C, which we consider to be neutral POWR ratings system. POWR ratings are calculated based on 118 different factors, each weighted to an optimal degree.
NKE is also rated C for growth, stability, sentiment and momentum. It ranks 10th out of 37 companies in the ranking Athletics and Recreation industry.
click here to see additional POWR ratings for NKE (Value and Quality).
Shares 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 future 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 announced a quarterly dividend of $0.40, payable on July 28, 2023.
The company pays an annual dividend of USD 1.60, which at the current price level translates into a profitability of 6.18%. It has a four-year average dividend yield of 3.33%.
In the fiscal first quarter ending April 29, 2023, FL’s total revenue decreased 11.3% year-on-year to $1.93 billion. Net income fell 72.9% year-on-year to $36 million, while EPS fell 72.3% year-on-year to $0.38.
FL’s EPS is expected to decline 96.5% yoy to $0.04 in the fiscal second quarter ending July 2023. Its revenue is expected to decline 9% yoy to $1.88 billion in the same quarter.
The stock has fallen 44.9% over the past three months, closing the last trading session at $24.61.
FL’s bleak outlook is reflected in her POWR ratings. Stocks have an overall D rating, which translates into sales in our POWR rating system.
FL is also rated F in Growth and Mood and D in Momentum and Stability. It ranks 36th in the same industry.
To access additional FL POWR ratings for value and quality, Click here.
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On Tuesday morning, NKE traded at $105.84 per share, up $0.64 (+0.61%). Year-to-date NKE is down -8.99% compared to the S&P 500 index’s 12.19% gain over the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which prompted her to start her career as an investment analyst. He holds a bachelor’s degree in finance and marketing and is pursuing a CFA program. Her fundamental approach to stock analysis helps investors identify the best investment opportunities.
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