The GOAT and Nike’s Moat

I played baseball in middle school – and loved it.

But basketball is my enduring sports passion, which makes sense considering how I’m 6’3”. I even played all four years during my time at Presbyterian College.

While my days of dunking are probably long gone, I’m still all about the sport. So that’s where my brain goes first when I think about Nike (NKE).

More specifically, I think about Michael Jordan, basketball’s greatest of all time (GOAT). And with good reason, I recently realized.

Because Jordan helped build Nike’s once-enormous business moat.

It was 1984 when the shoe company took a chance on the then 21-year-old rookie. What followed was the most impressive marriage between a consumer brand and an athlete.

If you can think of a better one, feel free to email me. But be warned in advance: I’m probably going to be pretty hard to convince.

You see, Air Jordan wasn’t merely a shoe. It was a status symbol: a cultural phenomenon that everyone who loved basketball – and many who didn’t – had to have. And it stuck even two decades after the man behind it stopped playing.

Under Nike’s previous wholesale-equivalent reporting, the Jordan Brand nearly hit $7 billion in fiscal 2024, up 6% from 2023. And while the company has changed its methodology since then, making it more difficult to compare apples to apples…

Suffice it to say that the sneakers and related apparel are still making money. The GOAT hasn’t changed.

But the moat is a very different story that needs to be explored.

Nobody disputes that Nike is one of the world’s most recognizable consumer brands. Everyone knows the Swoosh.

However, as I’ve said before, brand recognition doesn’t always translate into competitive advantage. And even when it does, that connection can fade.

An actual moat ultimately needs to manifest itself in economics such as:

All of which has been going downhill for Nike since its fiscal 2024:

Revenue has declined about 10% since 2024 level, and profitability has been even worse. In its recently reported fiscal first quarter:

And while gross margin improved 60 basis points (bps) to 42.8%, that was mostly due to lower warehousing and logistics costs. So there was very little to love.

Much of that pain is due to Nike's once unbeatable direct-to-consumer (DTC) strategy. While it didn’t completely cut out the middleman, it did heavily invest in its own stores to capture greater margins.

That’s why, as I explained about four weeks ago, Footlocker fell so far in the past decade. Because too many people were going directly to Nike to purchase sneakers.

But what we’ve been seeing is that the sword struck both ways, even if it took longer to show on Nike’s side. It turns out that retailers provide value after all by exposing products to consumers who wouldn’t otherwise go looking for them.

Recognizing that, Nike has been working hard to repair its relationship with wholesalers. And despite what the previously reported numbers indicate, it actually is seeing success since its wholesale revenue fell just 1% – a noteworthy difference.

That gives me hope that it can turn around those sales altogether in upcoming quarters.

What it doesn’t offer any insight into is the China situation, the part of Nike’s business that concerns me most. Reuters reported that greater China currency-neutral Q1 sales – which have been falling since 2022 – were down 26% year over year.

In response, Nike is reducing supply there and altering distribution. But it just goes to show how many missteps the company has made in recent years.

When product becomes too plentiful, it loses its value and consumers can more easily wait for discounts. Once they have that much control over pricing, the moat is automatically narrowed.

The same goes for too much successful competition – another ongoing China-specific issue. There’s just a lot Nike has to recover from.

And many investors are wondering if the road ahead isn’t passable at all.

All of this negativity is showing in Nike’s shares. They’re trading at 18.5x while their historical average multiple is 27x.

And shares traded as high as 46x back in November 2021.

Nike’s dividend is under strain as well. The company paid out about $610 million to shareholders that way during the latest quarter. Yet it expects adjusted fiscal 2027 earnings per share (EPS) of just $1.15–$1.35.

That’s why Nike's yield is approaching 5% while its shares have plummeted more than 80% from their November 2021 high: because earnings and cash generation have weakened.

That’s a potential sign of a sucker yield, where the company in question might have to cut its increasingly less-supported dividend.

Now, I say potential, not absolute. I’m actually not ready to give Nike that label just yet.

I have to recognize that CEO Elliott Hill has a lot on the line here since the company has now increased its dividend for 24 years straight. One more year, and it will become a dividend aristocrat, which is quite the achievement in and of itself.

That’s not a legacy easily ignored – or destroyed.

Yet I also have to recognize that the latest increase was just 3% instead of its historic 8%–10%. So clearly Nike’s dividend dream isn’t completely meshing with its financial capabilities.

And, let’s face it, if something has to give, it’s not going to be operations. The payout will just have to go.

Now, suppose that Nike eventually gets its revenue back to its 2023 achievement of over $50 billion.

Actually, let’s just say it recovers to $50 billion even.

At an 8% operating margin, that would mean $4 billion of operating income. At 10%, it's $5 billion. And at 12%, it's $6 billion.

Every 100 bps represents roughly $500 million of operating profit on a $50 billion revenue base. That's why I think there’s too much investment emphasis being made on sneaker sales and not enough on Nike's underlying economics.

Nike doesn't necessarily need spectacular revenue growth in order to recover. What it absolutely needs to do is restore its margins.

While I’m not betting that it will, I also can’t bet that it won’t. Not when its Jordan Brand is still such a billion-dollar industry in and of itself.

Not when it has other brands going for it like:

Not considering its other partnerships with athletes such as:

And not when it has other assets like its undeniable Swoosh and decades of intellectual property. All put together, that’s a global network that’s exceptionally difficult to replicate.

There’s no doubt whatsoever that Nike's moat is damaged. But I’d hold off on calling it all dried up.

In short, I’m not messing with this company either way.

Happy SWAN investing,

Brad Thomas
Editor, Wide Moat Daily