The Nike reset is here. Is the stock a buy?

It’s no secret that NIKE (NKE -1.20%) has been struggling lately. The sportswear giant has seen several quarters of lackluster growth and even said revenue will decline in fiscal 2025, which began in June. That was before the company ousted CEO John Donahoe, who is to be replaced on October 14 by longtime company executive Elliott Hill, who is coming out of retirement to take over the job.

In the midst of that transition, Nike reported fiscal first-quarter earnings Tuesday night. Wall Street expected a dismal quarter, and that’s what Nike delivered with a double-digit decline in revenue, a rare occurrence for top stocks during a stable economy.

Nike’s revenue fell 10 percent to $11.6 billion, missing estimates of $11.65 billion. Nike Direct revenue, which has been the company’s focus under Donahoe, fell 13 percent to $4.7 billion, with Nike’s digital sales down 20 percent, showing it is rapidly losing market share to rivals such as On Holding and DeckersHoka brand. Performance in its wholesale division wasn’t as bad, but wholesale revenue still fell 8 percent to $6.4 billion. Revenues also fell in all four of its geographic regions.

Notably, this drop in revenue occurred in a quarter that included high-profile sporting events such as 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, rose 15 percent in the quarter to $1.2 billion as it generally increases marketing spending for events like the two above.

As a result, earnings per share fell 26% to $0.70. While that beats estimates of $0.52, it shows how quickly Nike’s profits are disappearing.

In addition, due to the CEO transition, the company is withdrawing its guidance for the year and postponing the Investor Day conference it had planned for November. For the fiscal second quarter, revenue is expected to fall 8% to 10% and gross margin to fall 150 basis points, indicating another sharp decline in earnings per share.

Image source: Nike.

A period of transition

Part of Nike’s revenue decline is due to a planned shift away from classic sneaker styles like the Air Force 1 and Air Jordan 1, as it had relied too heavily on those styles rather than investing in new products. It also aims to tighten supply to support demand and better pricing as it shifts focus to the wholesale channel.

The company is seeing green shoots in some areas. In running, an area where 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 appears to be resetting its business to prepare for growth in fiscal 2026 as it trims supply for 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 rebound in Nike shares; the shares really rose when Starbucks replaced its CEO in August in hopes that Nike would follow suit, which it did last month. With the stock down about 50% from its peak, it’s easy to see why investors would want a change in leadership.

However, Nike isn’t as cheap as you might expect given how far the stock has fallen since its peak during the pandemic. With earnings per share continuing to decline, Nike now trades at a price-to-earnings ratio of 23.

That would be a decent price for a business like Nike that is delivering solid growth, but that’s not what’s happening right now, and a turnaround isn’t guaranteed.

Buying Nike now could pay off in the long run, but investors would be better off waiting for a lower entry price or clearer evidence that it’s on the way back. It may have to wait until incoming CEO Elliott Hill arrives. Expect to hear more as he takes over the company later this month.