ii view: Nike outlines a change of strategy under new CEO

Second-quarter results to 30 November

• Revenue down 8% year-over-year to $12.4 billion
• Earnings down 24% to $0.78 per share
• Share buybacks of $1.1 billion

Guidance:

• Expects third quarter revenues to fall by a low double digit percentage

Chief executive Elliott Hill said:

“We're taking immediate action to reposition our business, so we can get back to driving long-term shareholder value. Our team is ready to go, and I'm confident you will see more moments of Nike being Nike again." 

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ii round-up:

Nike Inc Class B (NYSE:NKE) outlined a change of direction under new head Elliott Hill with the sporting goods maker blaming a prior reliance on promotions for falling sales and profits. 

Former Nike executive and veteran Elliott Hill wants to take Nike back to a focus on ‘sport,’ upping product innovation, pushing its selling focus back towards wholesale and external retailers such as JD Sports Fashion (LSE:JD.), as well as reducing product discounting. Sales and profits for the second quarter to 30 November both fell year-over-year, although to a lesser degree than Wall Street had feared. 

Shares for the Dow Jones company retreated marginally in post results US trading having come into this latest news down by more than a third over the last year. That’s in contrast to a 28% gain for German rival adidas AG (XETRA:ADS) and a 12% gain for the Dow index itself during 2024.

Nike predicted sales for the current third quarter to late February to be down by a low-double-digit percentage. Analysts had been hoping for a high single digit retreat. 

Broker Morgan Stanley expressed concerns for a seemingly ‘elongated’ turnaround timeline, lowering its estimated fair value target price of $74 from a previous $80 per share. 

Sales for Nike’s core North American footwear category fell 14% year-over-year to $3.24 billion. Total worldwide sales for its Converse brand, acquired in 2003, retreated 17% to $429 million. 

Share buybacks for the quarter totalled $1.1 billion, down from $1.2 billion in the prior first quarter. New CEO Elliott Hill, started with Nike in the 1980’s, leaving the company in 2020. 

Third-quarter results are like to be announced mid-to-late March. 

ii view:

Began in 1964, footwear continues to generate its biggest slug of revenues at 68% over its last financial year, followed by clothes at 28% and equipment the balance of 4%. Geographically, its home North American is biggest at around 43% of sales. Europe, the Middle East and Africa comes next at 28%, with China 15% and Asia and Latin America the balance of 14%.    

For investors, a reliance on established brands such as Jordans and an arguable lack of product innovation has hindered performance. Promotional activity has fed into a 1% fall in the gross margin to 43.6%. Fashion trends can change quickly, while environmental considerations for the wider fashion industry also warrant consideration. 

More favourably, new head and former executive Elliott Hill is now looking to revamp group strategy. Plans detailed in late 2023 to potentially cut up to $2 billion in costs over the next three years are still being pursued.

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On the upside, pending CEO Elliott Hill is a longtime company veteran and former department head, who is likely to try and revamp Nike’s innovation and strategy. Plans detailed in late 2023 to potentially cut up to $2 billion in costs over the next three years are still being pursued. An end to recent election uncertainty and expected interest rate cuts for its home US market should help aid demand, while a focus on shareholder returns includes more than 20 consecutive years of dividend increases.  

For now, the strength of the Nike brand and a revamped strategy under the new CEO offer hope. That said, potential new investors are likely to await signs of a company turnaround before taking any interest.  

Positives: 

• Product and geographical diversity
• Ongoing shareholder returns

Negatives:

• Uncertain economic outlook
• Subject to currency moves

The average rating of stock market analysts:

Cautious buy