Nike (NYSE:NKE) and Tanger Factory Outlet Centers (NYSE:SKT) are both survivors of the retail apocalypse. Nike has expanded its direct-to-consumer presence with its online and brick-and-mortar stores even as other athletic apparel retailers have struggled. Meanwhile, Tanger’s outlet centers have maintained high occupancy rates as traditional malls have failed, since retailers still needed places to sell their excess inventories. Those discounts attracted a steady stream of bargain-seeking shoppers.
Prior the pandemic, Nike had been generating stable revenue and earnings growth. Tanger, however, struggled with tenant bankruptcies, store closures, and lease modifications throughout 2019, which suggested it wasn’t completely immune to the headwinds that have slammed traditional malls.
The pandemic hit both companies hard, but Nike’s stock still advanced nearly 40% over the past 12 months as investors looked past its near-term declines. Meanwhile, Tanger’s stock plunged about 60% as investors questioned its ability to recover from the shutdowns, and the suspension of its dividend in May exacerbated those concerns. Will investors continue to favor Nike over Tanger? Let’s dig deeper to find out.
Nike’s growth is already stabilizing
Nike’s revenue declined 4% (2% in constant currency terms) in fiscal 2020, which ended on May 31, as the COVID-19 crisis disrupted its supply chains and brick-and-mortar stores in the fourth quarter.
Nike’s digital sales surged during the crisis, but couldn’t offset its loss of brick-and-mortar sales. Meanwhile, higher fulfillment costs for online orders, higher tariffs, and discounts during the pandemic all weighed down its margins, and its EPS declined 36% for the full year.
In the first quarter of 2021, Nike’s revenue dipped 1% year-over-year (and stayed flat in constant currency terms) as most of its stores reopened. Its direct-to-consumer “Nike Direct” sales rose 12%, buoyed by an 82% increase in its digital revenue. Its gross margin remained under pressure, but lower operating expenses boosted its EPS 10%.
During the conference call, CFO Matthew Friend predicted Nike’s revenue would be “up high single-digits to low double-digits” for the full year, with “stronger than anticipated demand” for its brands “constrained in the near-term” by the pandemic. Friend expects Nike’s growth to improve “significantly” in the second half of 2021 as it resolves those constraints.
Analysts expect Nike’s revenue and earnings to rise 12% and 78%, respectively, this year. Looking further ahead, they expect its revenue to increase 11% in fiscal 2022, with 29% earnings growth.
But Tanger still faces tough challenges
Tanger’s total revenue declined 3% in 2019. However, it ended the year with an occupancy rate of 97%, up from 96.8% at the end of 2018 and marking the 38th consecutive year that percentage stayed above 95%.
Tanger’s net income more than doubled last year, thanks to its sales of four outlet centers. Tanger’s core FFO (funds from operations) per share, which exclude those gains and other one-time benefits and losses, declined 7%.
Those numbers indicate Tanger maintained a high occupancy rate by negotiating cheaper and shorter-term leases with its tenants — which reflect the broader struggles of brick-and-mortar retailers.
Unfortunately, Tanger’s occupancy rate dipped to 94.3% in the first quarter of 2020, and declined again to 93.8% in the second quarter as the pandemic shut down its centers across America. Tanger also warned that renewal rates for leases expiring within the year would be below its historical average of 80%, mainly due to tenant bankruptcies. It also allowed its tenants to defer their rental payments in March and April.
As a result, Tanger’s total revenue fell 26% year-over-year in the first half of 2020, and its core FFO per share plunged 47%. 95% of Tanger’s occupied stores had reopened by the end of July, but it’s still gradually collecting rent from those tenants.
Analysts expect Tanger’s revenue to decline 25% this year as its earnings sink into the red. Next year, they expect its revenue to rebound 8% with a slim profit — assuming it stabilizes its occupancy rates and rent collections.
The dividends and valuations
Nike has continued paying out dividends throughout the crisis, but its forward yield of 0.8% won’t attract any serious income investors. Tanger’s yield hit double-digit levels before it was suspended, but it probably won’t be reinstated anytime soon. Tanger is an REIT (real estate investment trust), which means it’s required to pay out most of its earnings as dividends to maintain a favorable tax rate, so it probably won’t resume payments until it’s profitable again.
Neither stock is a bargain right now. Nike trades at 50 times forward earnings, and Tanger has a forward P/E ratio of over 30. However, Nike’s resilience throughout the crisis, its confident outlook for the rest of the year, and its robust earnings growth arguably justify that premium. Tanger won’t go bankrupt anytime soon, but it needs to stabilize its business before it can be considered a compelling investment again.