It is never easy for a top performer like Nike to lower the bar, but it will be much easier to do so with a new leader.
The apparel giant on Tuesday had some bad numbers to report. Revenue declined 10% in its quarter ended Aug. 31 compared with a year earlier, in line with its guidance and Wall Street expectations polled by Visible Alpha. That marks the worst quarterly drop since the initial pandemic shock of 2020. But cost cuts, including layoffs, helped the company achieve better-than-expected earnings results. Net income was down 28%, much better than the 47% drop analysts had expected.
The company is in something of limbo right now, with Chief Executive Officer John Donahoe set to step down soon. Donahoe didn’t speak during the company’s earnings call Tuesday after the market close; Chief Financial Officer Matthew Friend led the call instead. Elliott Hill, a well-liked, 32-year Nike veteran, is set to return to the company and start in the CEO role on Oct. 14. Nike’s shares have rebounded by about 10% since the company announced his appointment, though they are still down about 18% year to date.
Despite the better-than-expected bottom line, Nike shares shed around 5% in after-hours trading following the earnings call, as the company made it clear that its turnaround might be more painful than investors thought.
For one, Nike said it expects revenue to drop 8% to 10% in the current quarter, worse than the 6.7% decline Wall Street was expecting. The company withdrew full fiscal-year guidance, a move implying that its annual revenue decline might be worse than the 5% drop that analysts were penciling in. That number would have already made it Nike’s worst annual performance since 1999. During the call, Friend made it clear that Nike’s deliberate pullback from key franchises—Air Force 1, Air Jordan 1 and Dunk—will continue to weigh on its top line for the rest of its fiscal year, which ends May 2025.
Not that there weren’t any bright spots. In its Greater China market, revenue fell just 3% on a constant-currency basis, better than the 7% decline Wall Street expected. That speaks to the brand’s enduring strength in the region, contrasting with bearish commentary from major Chinese sports retailers. And consumers globally are responding to innovation: Sales of newer footwear products rose by a double-digit percentage last quarter. While this development is a positive indicator for product launches to come, they aren’t yet big enough to offset weakness in Nike’s classic sneakers.
The brand’s efforts to cozy up to its once-neglected retail partners are having mixed effects. Order books for the coming spring season were roughly flat compared with the prior year, lighter than Nike had hoped. Upstart brands such as Hoka and On have made concerted efforts to fill the shelves that Nike left bare over the past few years; it is clear that re-establishing dominant status with those retail partners won’t be easy.
Investors don’t have much to go on just yet, except that Hill seems to be universally liked by Nike employees and that he has experience dealing with retail partners. On the call, Friend said employees’ response to his appointment has been “tremendous.” He added that Hill played an important role in turning around Nike’s North America business in 2010. The market, however, won’t get a clear read on his strategy for a while. Nike postponed its November investor day, which means investors might not get to hear from the new leader until next year.
When Hill officially joins, he will have the chance to perhaps lower the bar even further. When Adidas’s current CEO, Bjørn Gulden, joined in early 2023, he called that year a “reset year” and lowered expectations. After a year of no revenue growth (on a currency-neutral basis), Adidas returned to healthy growth in the first two quarters of 2024. Adidas shares have appreciated about 90% since Gulden took over.
Today, Nike’s shares are trading at 27.8 times forward earnings, about 12% lower than its five-year average and 23% cheaper than its closest competitor, Adidas. While a lot of bad news is already baked into Nike’s stock, tempted investors might want to wait until a clear treatment plan emerges. After all, its latest call highlighted just how deep Nike’s injuries are.
Write to Jinjoo Lee at jinjoo.lee@wsj.com