The Nike Reset Is Here. Is the Stock a Buy?
It's no secret that Nike (NYSE: NKE) has struggled lately. The sportswear giant has posted several quarters of weak growth and even said that revenue would decline in fiscal 2025, which began in June. That was before the company ousted CEO John Donahoe, who is set to be replaced on Oct. 14 by longtime company executive Elliott Hill, who is coming out of retirement to take the job.
In the middle of that transition, Nike reported fiscal first-quarter earnings Tuesday night. Wall Street was expecting a dismal quarter, and that's what Nike delivered with a double-digit decline in revenue, a rare occurrence for a blue-chip stock during a stable economy.
Nike's revenue fell 10% to $11.6 billion, below estimates of $11.65 billion. Nike Direct revenue, which has been the company's focus under Donahoe, was down 13% to $4.7 billion with a 20% decline in Nike digital sales, showing it's rapidly losing market share to rivals like On Holding and Deckers' Hoka brand. Performance in its wholesale division wasn't as bad, but wholesale revenue still fell 8% to $6.4 billion. Revenue also fell in all four of its geographic regions.
Notably, that decline in revenue came during a quarter that included high-profile sports events like the Summer Olympics and the Euro Cup soccer tournament, which typically drive spending on sports apparel and footwear. Nike's spending on "demand creation," or marketing, jumped 15% in the quarter to $1.2 billion, as it generally increases marketing spending on events like the two above.
As a result, earnings per share fell 26% to $0.70. While that beat estimates of $0.52, it shows how quickly Nike's profits are disappearing.
Plus, due to the CEO transition, the company is pulling its guidance for the year and postponing the Investor Day conference it had planned for November. For the fiscal second quarter, it expects revenue to fall 8% to 10% and gross margin to decline by 150 basis points, indicating another sharp drop in earnings per share.
A transitional period
Part of Nike's revenue decline is due to a planned shift away from classic sneaker styles like Air Force 1 and Air Jordan 1, as it had been relying too much on those styles rather than investing in new products. It's also aiming to tighten supply to support demand and better pricing as it shifts focus back to the wholesale channel.
The company is seeing green shoots in some areas. In running, an area in which it has struggled in recent years, the company returned to positive growth in the quarter and is seeing an increase in demand in its order book.
Nike seems to be resetting its business in preparation for growth in fiscal 2026 as it cuts back supply on core brands, but there's still a bumpy road ahead, especially as it prepares for a leadership change.
Is Nike a buy?
Investors seem to be anticipating a turnaround in Nike stock; shares even rose when Starbucks replaced its CEO in August in hopes that Nike would follow suit, which it did last month. With the stock down roughly 50% from its peak, it's easy to see why investors would want a leadership change.
However, Nike isn't as cheap as you might expect considering how far the stock has fallen from its peak during the pandemic. With its earnings per share continuing to fall, Nike now trades at a price-to-earnings ratio of 23.
That would be a decent price for a business like Nike that's delivering solid growth, but that's not what's happening right now, and a recovery isn't guaranteed.
Buying Nike at this point could pay off over the long run, but investors are better off waiting for a lower entry price or clearer evidence that a turnaround is afoot. That may have to wait until incoming CEO Elliott Hill arrives. Expect to learn more as he takes over the company later this month.
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Jeremy Bowman has positions in Nike and Starbucks. The Motley Fool has positions in and recommends Nike and Starbucks. The Motley Fool recommends On Holding. The Motley Fool has a disclosure policy.
The Nike Reset Is Here. Is the Stock a Buy? was originally published by The Motley Fool