Nike Shares Slide As Sales Decline. Can the new CEO help the stock recover?

NIKE (NKE 0.18%) Shares fell after the athletic apparel and footwear company reported disappointing sales and withdrew its guidance for the year. The stock is now down over 20% year to date.

The company also postponed its next investor day as its new CEO prepares to take over later this month and lay out his plan to help turn the company around.

Let’s take a closer look at Nike’s latest quarterly results and see if its new CEO can implement a plan to help the stock bounce back.

Stumbling over a low bar

Nike didn’t exactly set a high standard for its fiscal first quarter — it guided for a 10 percent drop in revenue for a period when it should have received an Olympic boost. However, he couldn’t even overcome that simple hurdle.

For the first quarter of fiscal 2025 (ended Aug. 31), Nike’s sales fell 10% year over year to $11.59 billion, below analysts’ consensus of $11.65 billion. Nike brand revenue fell 10 percent to $11.1 billion, while Converse sales fell 15 percent to $501 million. Through the retail channel, Nike’s direct revenue fell 13 percent to $4.7 billion, and wholesale revenue fell 8 percent to $6.4 billion.

On a positive note, the company was able to expand its gross margin by 120 basis points to 45.4%, helped by lower warehousing and logistics costs as well as increased pricing. Management also reduced its operating expenses, total selling, general and administrative (SG&A) costs by 2%, despite a 15% increase in demand generation expenses.

However, earnings per share (EPS) fell 26% to $0.70. But that was more than the $0.52 analysts were looking for coming into the report.

Given Nike’s struggles, one metric to watch is inventory. If that value starts to rise while sales are falling, it could lead to more problems down the road with markdowns dragging down gross margins. Total inventories fell 5 percent to $8.3 billion, but were up from $7.5 billion last quarter. The company said it has high inventory, particularly in China, which has led to more promotional activity in the country. This is something to monitor further.

The company withdrew its guidance for the full year, but said its revenue expectations had moderated since the start of the year. Also, gross margins are now expected to decline this year.

Overall, Nike saw weakness in all of its regions, both in its direct and wholesale channels. Its classic franchises, which include the Air Jordan 1, Air Force 1 and Dunk, fared particularly poorly as they saw a 50% drop in the digital channel. Declining traffic at Nike Digital and partner stores in Greater China were also cited as weak areas.

The company expects Jordan Brand, along with its lifestyle brands, to continue to post double-digit declines for the rest of this fiscal year. However, Nike said it sees some strength in global football (soccer), fitness and running.

Image source: Getty Images.

Can the stock rebound under its new CEO?

I think Nike missed an opportunity by not just significantly reducing guidance before its new CEO, Elliott Hill, took over. This is a classic play that usually helps a stock rebound when the company finally gets over the low bar with its new CEO at the helm. It may have created a little more pain in the short term, but it would have had long term benefits.

Hill will now be responsible for helping to return Nike to its former glory. The new CEO was a longtime Nike employee, starting as an intern in 1988 and rising to president of Consumer and Marketplace when he left in 2020, shortly after the company hired CEO John Donahoe.

Donahoe is believed to have focused too much on direct sales, damaging wholesale relationships, without focusing on innovation. At the same time, it seems to have oversaturated the market with Nike’s classic brands, which is why the company is pulling back on them so much now.

Hill will be tasked with fixing these mistakes. Nike is one of the most iconic brands in the world and has a lot of experience with the company. A turnaround won’t happen overnight, but Hill seems like the right person for the job given his various roles with Nike over a long period of time. Nike usually hires its CEO from within, and it was a clear mistake to bring in an outsider with no brand experience.

Valuation-wise, the stock now trades at a forward price-to-earnings (P/E) ratio of just under 30, but that’s largely due to Nike’s struggles and its declining earnings forecasts.

NKE PE report data (before) by YCharts

I think the stock looks like a rebound candidate under Hill, but it will take some time. Hill just can’t flip a switch that will suddenly give the company a bunch of innovative new products. As such, I don’t think investors need to rush out to buy the stock today, but I think it will be a solid candidate for a comeback next year.