Nike shares slide lower as turnaround plan stalls
2min read Nike reported fiscal second-quarter revenue of $12.35 billion, which, despite falling 7.7% year-over-year, surpassed analyst estimates of $12.13 billion. Adjusted earnings per share (EPS) came in at $0.78, significantly ahead of the consensus estimate of $0.63 but down from $1.03 in the prior year. Gross margin declined to 43.6% from 44.6% a year earlier but beat estimates of 43.1%. While the results exceeded low expectations, the company offered a cautious outlook, projecting third-quarter revenue to decline in the low double digits and gross margin to contract by 300-350 basis points. Nike refrained from providing full-year guidance, citing ongoing macroeconomic challenges.
Revenue performance varied across categories and geographies. Footwear revenue dropped 11% year-over-year to $7.66 billion, apparel revenue declined by just 1% to $3.74 billion, while equipment revenue grew 14% to $544 million. Geographically, North America revenue fell 7.9% to $5.18 billion, while Europe, Middle East, and Africa (EMEA) revenue dropped 7.4% to $3.30 billion. Greater China revenue decreased 8.2% to $1.71 billion, missing expectations of $1.77 billion, and Asia Pacific and Latin America posted a 3.4% decline to $1.74 billion.
Nike's turnaround plan, spearheaded by newly appointed CEO Elliott Hill, is the centerpiece of its strategy to regain momentum. Hill emphasized a return to a sport-obsessed, athlete-driven brand identity while focusing on premium product offerings and innovation. He also committed to reducing markdowns in Nike's direct-to-consumer channel to enhance margins and reposition the brand as a leader in performance wear. However, these initiatives will weigh on sales in the short term as the company clears out older inventory through discounting.
The turnaround plan includes significant investment in brand marketing to support new product launches and regain market share lost to competitors like On Holding and Hoka. Hill also plans to rebuild relationships with wholesale partners, which were neglected under the previous strategy. Analysts noted that Hill's approach represents a departure from the prior leadership, which faced criticism for diluting the brand's value. While the strategy holds long-term promise, the execution will likely take multiple quarters, as Hill candidly acknowledged during the earnings call.
Nike Direct revenue fell 13% year-over-year in the second quarter, highlighting the challenges of attracting traffic to its physical and digital platforms. Hill admitted that the lack of fresh and inspiring products has hurt consumer engagement, underscoring the urgency of revitalizing Nike's innovation pipeline. Efforts to clear inventory and introduce new merchandise will require significant operational and financial discipline, with substantial restructuring charges expected to impact near-term results.
The market's reaction was mixed. Nike shares surged 11% in after-hours trading immediately after the earnings release but reversed course, falling 6% in pre-market trading as investors digested Hill’s cautious commentary. Analysts were divided on the company’s outlook. Stifel lowered its price target to $75 from $79, citing an uphill climb for the turnaround, while UBS reduced its target to $73, highlighting material downside risks. Telsey downgraded the stock to "Market Perform" with a target of $80, citing uncertainty around the timeline for recovery.
Despite short-term headwinds, analysts generally acknowledged the potential for a long-term rebound. Nike's brand heritage and market position provide a strong foundation for recovery, with some analysts maintaining a positive view on the company’s future. Fubon upgraded the stock to "Buy" with a price target of $92, expressing confidence in Hill’s ability to execute the turnaround. However, most remained cautious until there is greater visibility on stabilization and growth.
Nike’s financial health remains a key support for its turnaround efforts. The company returned $1.6 billion to shareholders in the second quarter through dividends and share repurchases. Inventories were flat year-over-year at $8.0 billion, reflecting progress in managing supply chain challenges, while cash and equivalents stood at $7.98 billion. Analysts noted that these metrics provide Nike with the flexibility to invest in its strategic priorities despite current challenges.
In summary, Nike’s second-quarter results offered some positives, but the company’s outlook remains clouded by significant near-term challenges. New CEO Elliott Hill’s ambitious turnaround plan focuses on premiumization, innovation, and wholesale partnerships, but its execution will take time and weigh on profitability. While analysts and investors remain cautiously optimistic about Nike's long-term prospects, the road to recovery will require patience and disciplined execution.
