Can one of the worst performers on the Dow turn things around?
Nike (NYSE:NKE) stock has been one of the worst performers on the Dow Jones Industrial Average this year.
The iconic shoe and apparel brand has seen its shares plummet roughly 30% year-to-date, making it the second worst on the Dow, ahead of only Boeing (NYSE:BA). But it may soon fall behind the resurgent Boeing, which is up 20% over the past month.
However, Nike’s woes go back further than 2024 as Nike is down 37% over the past 12 months and has an average annualized return of -22% across the past three years.
Part of it is the high inflation environment, but the fact is, the inflation rate has come down and other retailers have managed to better navigate this environment.
In October, Nike took a big step toward its turnaround when it hired former Nike executive Elliott Hill as CEO, replacing the retiring John Donahoe.
On Thursday, Nike released its first earnings report with Hill at the helm and the results were somewhat encouraging.
Nike being Nike
While Hill was only in the corner office for half the quarter ended November 30, his impact has been apparent.
Revenue was still down about 8% in the quarter year over year to $12.4 billion, but it was better than approximately $12.2 billion that analysts had anticipated.
Further, net income dropped 26% to $1.16 billion, or 78 cents per diluted share. Again, not great numbers, but much better than the 65 cents per share that analysts had estimated.
But looking beyond the numbers, Hill outlined a new strategic direction for the firm.
“We’re taking immediate action to reposition our business, so we can get back to driving long-term shareholder value,” Hill said. “Our team is ready to go, and I’m confident you will see more moments of Nike being Nike again.”
Hill has been busy, meeting with consumers, partners, the commissioners of the NFL, NBA and WNBA, MLB, and NWSL, the heads of top NCAA conferences, and Nike athletes like Michael Jordan, Ronaldo, Sabrina Ionescu, and A’ja Wilson.
“The consistent feedback we’ve heard is pretty simple, let’s see more of Nike being Nike,” Hill said. “And that starts with leveraging all the advantages that make us great.”
Regain “obsession with sport”
Hill opined on the earnings call that Nike hadn’t been maximizing its strengths – the iconic brands, roster of athletes, teams and leagues, patented innovation, a deep catalog of products, relationships with partners, and its talented workforce.
In summary, he said: “We lost our obsession with sport.”
That will change, said Hill, as the company will “lead with sport and put the athlete at the center of every decision.”
Hill also suggested that Nike will focus less on lifestyle, retro, and streetwear styles and get back to leveraging athletes’ insights to accelerate innovation, design, product creation, and storytelling.
In addition, Hill talked about the need to “build back an integrated marketplace,” shifting focus back to selling Nike products through retailers and wholesale partners and not just through digital sales via Nike Direct.
Hill said Nike is committed to building back and earning the trust of its wholesale partners, many of which “feel we turned our back on them.” That includes retailers and partners like Dicks Sporting Goods, JD Sports, Foot Locker, Sports Direct, and others.
“Our marketplace will be consumer-led putting our best product and presentation in the path of the consumer, wherever they choose to shop,” Hill said.
Some near-term headwinds
Hill knows the transformation will take time and could result in negative near-term results. One of the first actions is to clear out old inventory with discounts to make room for new, higher priced products. Consumers will surely find some great deals, but it could result in revenue taking a hit.
In the fiscal third quarter, CFO Matt Friend said the company expects revenue to be down low double-digits due to the inventory dump and other turnaround measures and headwinds. Further, Q3 gross margins are anticipated to be off approximately 300-350 basis points. And a greater headwind is projected for the fiscal fourth quarter compared to the third quarter.
Nike’s P/E ratio is reasonable, but it could move even lower over the next few quarters, given this outlook. Investors interested in returning to Nike may find a lower entry point in the coming months. But keep an eye on Nike stock, as it has a good dividend and it appears that the company is headed in the right direction.
