Motley Fool Hidden Gems Investing - Nike is Back in the Race

Episode Date: June 30, 2025

Nike stock moves higher after Q4 earnings. Andy Cross and Jason Hall discuss - Why Nike stock rallied after its latest earnings - Also: Home Depot to buy GMS for $5.5 billion - And will F1 the Movie drive Apple’s stock? Companies discussed: NKE, HD, GMS, QXO, AAPL, NFLX, AMZN Host: Andy Cross Guests: Jason Hall Engineer: Dan Boyd Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, "TMF") do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. Learn more about your ad choices. Visit megaphone.fm/adchoices

Nike is back in the race. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Andy Cross, joined here by Motley Fool contributor Jason Hall. On the docket today are earnings from Nike, Jason, Home Depot's latest acquisition, and we're lifting the hood on F1, the movie, and what it means for Apple. So, Jason, let's dive right into it. Nike's fourth quarter earnings were last week. The stock jumped 15% on that Friday after the footwear giant expressed confidence that its turnaround that Elliot Hale, the CEO who joined eight months ago, is moving along, even though the quarter continues to show that challenge. So, Jason, is that investor enthusiasm warranted? Honestly, I think I would

frame it a different way. The stock jumped on earnings, but if you look over the past five years, Nike stock has fallen after earnings far more often than it's gone up. The stock's still down a quarter from where it was five years ago, and it's down almost 60% from the high. I don't think this is about enthusiasm as much as it is investors reframing and resetting their expectations. And seeing the company with those lower expectations and the fact that this turnaround is going to take a while, there are some signs that it's starting to work. I mean, Jason, sales down 12% year over year, still ahead of some estimates. Earnings per share were down 86%, beating consensus a little bit. The big thing was on the gross margins, down 440

basis points to 40%. If you look a few quarters ago, gross margins were around 45%. We're seeing this impact on the inventories for Nike. I think that's a big story that investors are focused on with this turnaround. Yeah, there's no doubt about it. One of the big parts of the Nike struggles over the past few years is trying to figure out their go-to-market strategy. They heavily prioritize their own digital channels, alienated a lot of the wholesale market, which is the retail channel. And they're having to come back around to that a little bit with hat in hand. And they're starting to see a little bit of signs of improvement. We know that Dick's big acquisition that they're working on with Foot Locker, that hopefully is going to be

positive for Nike. And maybe the big thing is the e-commerce presence of finally accepting that they need to be part of the Amazon ecosystem. There's some limited release products that are going to be showing up there this fall. Those are things that the market wants to see. The company has to embrace customers wherever they are, and then try to have a little bit of exclusivity with its own e-commerce. I think that that's a successful formula. I think the market agrees, too. Yeah, one thing about Jason, about their five win-now principles, which is kind of they're like, right now we are focused on Elliot Hill again. Coming back in, he's a long-term veteran, joined about eight months or so ago, trying to kind of get the branding back for Nike, build back the Nike goodwill, focus on things like culture, product, marketing, the ground game being, as you were saying, where customers are on the ground, focusing in key sports, right-sizing those important brands that have kind of those legacy brands. What I really like is they're restructuring the team and the whole focus back around sport,

Jason. They're focused back on cross-functional teams focused on specific sports. I think that is a really important focus for this Nike turnaround. And while we're not seeing it in the earnings or the performance right now, I think what I consider enthusiasm, and I think the stock is actually pretty attractive here, even after that jump, I think the enthusiasm is warranted because of the way that Elliott Hill is going about refocusing the Nike brand and importantly, the Nike culture. Yeah, I think that's right. Focusing on the brand, I'll start there. I've talked to a ton of people across sports that say that a lot of Nike's success right now is selling things that they were selling 30 years ago. Obviously, it's not exactly the truth, but

it feels that way. They've certainly lost their innovative edge against on-running other brands that have taken share and having that hyper-focus back on the products for that individual performance for that particular sport, I think is something that Nike has not done as well with. And if they can show that and say, look, we can still innovate. We can come out with products that are going to be better, not just the fit, but the performance. That's where Nike can reestablish itself as a leader. You know, it's interesting. They're going to do a little bit of surgical pricing. They mentioned tied to that Amazon a little bit later this fall. They do have a big tariff impact of about $1 billion because of all the sourcing they do overseas. Although

they're trying to change that, they're going to move a little bit away from China, they think, as a percentage of sales, that will drop going forward. But they do still have those impacts, and it's going to show up in the gross margin over the next quarter or two. But the expectation, Jason, is that it's going to improve throughout the year. Yeah, that's right. Andy, everybody in apparel and footwear is dealing with the impact of tariffs, the potential impact. That story is going to continue to be part of the background for some time to come. So, I'm taking all of that with a grain of salt. I think the supply chain is probably going to look more like it did five years ago than change going forward. But the company does have to take some financial steps

to make sure it's prepared for whatever happens there. Jason, how about the stock here? About $71, $106 billion market cap. You get a little dividend, 2.2%. Hopefully, bottoming on the earnings side that you look going forward is going to be meaningfully higher. Do you find the stock attractive? I do. I did a video for the Motley Fool's website a couple of weeks ago, and I said that there were signs that the turnaround was working. We'd get more information once earnings came out, and they just did. And again, probably things are going to maybe take a little longer than we expected. But I think even with the stock up from where it was a couple weeks ago, I think there are definitely signs that it's worth maybe starting a position,

following things out in. It's not super cheap right now, but I think if the trend continues under Elliott's leadership, then this is going to work out to be a good price. Yeah, certainly not on current earnings, but hopefully on the future earnings. So I agree in agreement there. I think Nike looks attractive here. After the break, Home Depot goes shopping. You're listening to Motley Fool Money. New from Nespresso.

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battle to acquire the company for 5.5 billion jason gms has been on the auction block really probably for the past month or so since QXO, another building product supplier and technology company, put out an offer for about $95 per share. Home Depot's paying $110 per share. Did Home Depot win the acquisition battle here, but lose the capital allocation war? I think that's really the question that I have. So, Home Depot, about a year ago, got into the distribution business that I think dropped $18 billion to buy a distributor. And part of the long-term strategy was, hey, look, this is an area we can consolidate. And these are builders and customers that are not coming into Home Depot no matter how well we work with them.

It's big, big distribution. And so, the plan had been to do that. So, now, at the same time, you mentioned QXO. So, that's Brad Jacobs. Brad Jacobs is the M&A master. This is somebody that has built a career on multi-bagger businesses, that he's made a lot of people a lot of money finding industries that are ripe for consolidation, that are low-tech, that a layer of technology can make a tremendous amount better. QXO fired the opening salvo, as you said, with an unsolicited offer to buy GMS. And then, Home Depot, we hear, is getting involved. So, the question that I'm going to continue to ponder is, did Home Depot win it, or did Brad Jacobs and team just walk away because it got too pricey for them? If you look at the numbers, 10 or 11 times,

I believe 10 or 11 times EBITDA. Not crazy expensive, but certainly more expensive than the discipline price you would see a Jacobs-run business want to pay. Yeah. Sorry, about one times sales, as you mentioned, 10 to 11 times EBITDA. EBITDA has been down a little bit for the past year or so, but also because of the housing market we know. But GMS, which by the way, stands for Gypsum Management and Supply, runs 320 distribution centers selling things, including things like wallboard and ceilings, steel framings. It runs about a hundred tool sales, rental and service centers. So together, you're going to put together 1,200 locations, 8,000 trucks making tens of thousand deliveries to job sites every day.

What I like, Jason, as you mentioned, is these kinds of acquisitions for distribution scale matters. This is a very fragmented business. I see this acquisition by Home Depot. This is a $5.5 billion acquisition by Home Depot. Home Depot is a massive company. Home Depot has about $45 billion of debt on the balance sheet. It's not going to add a ton more debt to the balance. They have $1.5 billion of cash almost. I think from a management perspective, it's fairly attractive to Home Depot. And I can see why GMS would choose Home Depot versus QXO, even with Brad Jacobs' intelligence. But it does see, when I look at the ability for Home Depot, get a little bit more from every distribution node. I think it's attractive. And that multiple,

as you mentioned, for Home Depot, I think, is not all that high. I think they're getting a good deal here. I think it probably works out, so long as this remains a part of the strategy for Home Depot, consolidating this fragmented distribution industry that's very different from its retail business. Now, I will also make a prediction that Brad Jacobs at QXO made a big splash when they acquired Beacon Roofing as the first $11 billion deal, so getting in the roofing business, one of the big roofing suppliers. My prediction is that we're going to see Home Depot in its distributor segment and Brad Jacobs at QXO going head-to-head on more acquisitions over the next five to 10 years and probably both do well in consolidating because there's so much

room to consolidate this market well that's the thing it's so fragmented so i think there's they can both be winners here brad jake is seriously if you look at his acquisition or look at his history of running companies with xpo and others have done very well over over the years and like you said he's a he's a real uh he has this down to a science the beacon roof and acquisition that SRS acquisition by Home Depot, as you mentioned, for a little bit more than $18 billion really got them back into the distribution game. And so, they're trying to cobble up that together. Both of these companies are trying to serve the contractor market, which is, as you mentioned, very fragmented, trying to increase the value of that network. And so, for Home Depot, I think

it's a good acquisition, I think, at a reasonable price. And I think Brad Jacobs was like, listen, there's going to be other opportunities. I'll let this one go. Home Depot, you can take this and I'll focus my attention elsewhere. I do have a question, Jason, which is, as you think about either Home Depot stock or QXO stock, obviously GMS is going to be part, if it all goes through, part of Home Depot. Is there anyone that stands out as more attractive to you? So there's my answer and then there's the answer that people listening need to think about individually. So for me, I think QXO is really attractive because I'm a big believer in Brad Jacobs and the track record and the process when it comes to being disciplined

and finding these industries to consolidate, starting from a really small size, this can be a massive compounder. Now, again, that's what I'm looking for. I think investors that are looking for maybe the higher floor of an industry-dominant leader, like a Home Depot, that has a pretty solid dividend base, dividend growth, and can continue to do well for investors over time. But you want something that's a little more stable, a little less volatile, then I think Home Depot is a pretty compelling investment right here. What about you? What do you think? Well, QXO at $14 billion, I think the upside's a lot higher. I own Home Depot. It's a large position in my portfolio. The stock hasn't done all that well over the past year or so. I think

this is a nice bolt-on acquisition for them. Doesn't add a ton more goodwill to the balance sheet, maybe $2.5 billion or so on top of their $20 billion they have. I think it's reasonable. I think it's a decent price. I think they'll be able to get more out of it and continue to grow the GMS side of the business tied to SRS. It's just that Home Depot, like you said, is probably kind of the high single-digit kind of per-year grower, not one that's going to light anything on fire going forward, Home Depot, that is.

Well, their leverage is going to be buying back shares. That's how you boost per-share return there, too. 100%. Coming up next on Motley Fool Money, will F1 the movie drive Apple stock higher? You're listening to Motley Fool Money. Spotify Ads Manager makes it easy to create your first audio ad in minutes for free. Sign up today, launch a campaign, and start reaching your audience. Brad Pitt's new movie F1, made by Apple Original Films,

hit the theaters this weekend to positive reviews and decent amount of money, Jason. But here's my question. Why is a $3 trillion company like Apple focused so much on making a film like F1, even with Brad Pitt? Because they can. They found the money in the couch cushions, and it sounded like a fun vanity project. Yeah. They don't want to buy back more stock. They've got plenty of places to invest that capital. Yeah. In all seriousness, we're both

being a little bit glib here. Apple TV Plus and their studios business has actually created some exceptionally high-quality content. It's still a bit of an also-ran compared to the big players in the space like the Netflixes of the world. But to me, I think it's a reminder that Apple is focusing on quality more necessarily than quantity. It's part of its strategy with streaming and media content writ large. Does that mean the other ones are focused more on the quantity side, less on the quality side, you think? I think a little bit both. I think all of them, there's a tension between the two, right? And it's where are you leveraging more towards. And if you're a Netflix, for example,

this is your entire business. You have to put out lots of content that's going to attract lots of people and it's got to be very, very good quality. If you're an Apple, where does this fit in your entire ecosystem of things? And what you're looking to do maybe is a little bit different than say what Amazon is looking to do with Amazon prime TV. So our Amazon prime video, I should say where Apple does seem, if you look at the content that they've produced, it certainly doesn't have the volume that you see at some of these other large players, but what it does provide is an additional layer of stickiness to the platform. Do you think that they will up the quantity game to be more competitive? I mean, I think about this with Apple, right? So, you know, stories

and reports are surfacing 200 million to 300 million more on the entire cost to make this film and apple finance a chunk of change of that as they are you saying they have exclusive right exclusive rights once it hits apple tv they'll be there they splash marketing budgets all over the place they had it in um apple stores they had it featured in apple music apple maps app they they had a big marketing push towards it obviously to to show that they can be competitive in this place in this space i'm thinking like this apple generates about 400 billion dollars or so in revenue they generate gosh 100 billion dollars in in profits almost 20 about a quarter or so their business is tied to services and so when i think about apple building out that ecosystem

jason and the glue that they're putting together as you mentioned things like streaming to be competitive against likes with not just netflix but also the likes of amazon and the likes of YouTube for a company that it kind of has, you know, middling growing that continued growth in the services side of the business is important. And I think that's one reason why they are now recognizing that because they generate such great returns on their investment, this is a place they can splash some capital. Netflix here. They want your eyes. They need you. They need as much of as many people's time as they can get, because this is their entire business. Amazon wants your wallets. And the bottom line is that nobody's going to, uh, cancel or subscribe to Amazon prime

just for prime video. It's a bolt on thing that keeps you in the ecosystem and drives you there. Now, if you're Apple, think about some of the things they've done with content. Like one example is that they own the rights to the Charlie Brown content. Think about Ted Lasso shows like this. I think where Amazon wants your wallet and Netflix wants your eyes, Apple wants your heart. They want you drawn to these things that you remember from your childhood. Brad Pitt headline products are very, very compelling. Ted Lasso, it's become like a cultural touchstone. I think if they focus more on those, almost like the HBO model of the 2000s, of developing just a few really high-quality contents that are strong enough to keep you attached, that's where this

fits in with Apple and where Apple can win with this. Whether this part of the business is necessarily profitable on its own basis, I think eventually they want to see that. But if it creates value for the entire ecosystem, I think that's the most important thing for Apple here. Is Apple attractive from a stock perspective? Again, I mentioned before, it's, it's the, the growth has really kind of slowed. Um, the stock has not been a super performing here and now it sells at, you know, kind of like in that 27 to 28 times earnings perspective is, is, is with a lot of share buybacks, as you mentioned in exceptionally profitable ways to invest, but still playing catch up on the AI side is Apple attractive

to you right now? Uh, not at all. I love the business. I love the products. I'm a deep user of Apple products. And one of those people that signed up for Apple TV plus for Ted Lasso and just hasn't canceled it because there's so many other good unexpected products, uh, programs that they have there. But the bigger concerns for me about around a company like Apple is it's so fully valued. It's not growing AI. I don't know that it's necessarily a concern right now, but at some point they're, they're trailing in that race for AI powered products could potentially sneak up and hurt the company. They lack a real catalyst for the next leg of growth. Nothing is lined up to drive growth that would make 27, 28 times earnings or higher

compelling to me. So I think there's more risk of underperformance. I don't think investors are going to lose a ton of money here. I think there's a bigger risk of underperformance if you're making this a substantial portion of your portfolio. Yeah, I agree. I think it's probably more in the money-making category than kind of adding to here. I'm an owner of it and I'm just sitting on my shares, but not one that jumps to the top of my buy list right now, Jason. I do want to see a little bit more innovation from them yet to come. I mean, I like the movies, but I do want to see innovation into the product cycle. And that's a wrap for us today here on Motley Fool Money. Jason Hall, thanks for being here. Absolutely. This was fun. We'll do it again

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