On June 27, Nike (NKE -1.12%) CEO John Donahoe started the earnings call for the fiscal fourth quarter of 2024 by saying that fiscal 2025 would be a "transition year." Little did he know at the time that Nike would be transitioning away from him to a new CEO.
In retrospect, maybe investors should have seen this coming. Nike stock is down about 10% since Donahoe became CEO in January 2020. In fairness, the business has grown during his tenure. But in the Q4 earnings call, management admitted that it needed to focus on "taking back market share."
How did quintessential athletic apparel brand Nike lose market share? Many analysts believe that Donahoe -- an e-commerce veteran from eBay -- pushed Nike too far into online direct-to-consumer sales. On the surface, it wasn't a bad idea. After all, selling direct-to-consumer allows companies to charge full price and command better profit margins.
However, it turns out that people still like going to the store and trying on shoes before buying them. And with Nike giving up some space on shelves to focus on e-commerce, up-and-coming shoe companies were able to get better exposure and steal market share.
Most investors lost hope with Nike. For evidence, consider that the stock currently trades at its cheapest valuation in over 10 years. But there were still some who evidently believed the company could regain lost ground. Among them is billionaire Bill Ackman, a well-known value investor. His hedge fund, Pershing Square, recently made a roughly $275 million investment in Nike stock.
On Sept. 19, Nike announced that Elliott Hill would be the new CEO starting on Oct. 14. What can investors expect now with this surprising shakeup in management?
What will change at Nike now?
Elliott Hill began his career at Nike in 1988 as an intern. From there, he worked himself up to President, overseeing marketing and commercial operations for Nike and the Jordan brand. Hill retired in 2020 but is now back as CEO of the entire company.
Nike is scheduled to report financial results for its fiscal first quarter of 2025 on Oct. 1. Unfortunately, Hill doesn't start until Oct. 14. So investors likely won't hear anything specific from Hill regarding his vision for the company until a later date.
In the meantime, investors can only speculate what it might mean for Nike to have Hill at the helm.
I believe the biggest factor for investors is that it appears that Nike is making a strategic change here. When it hired Donahoe, it went with a company outsider and an executive without experience in the shoe industry. In contrast, Hill is a long-tenured Nike insider who's directly responsible for much of the brand's success in the past.
In other words, it feels like Nike is getting back to its roots with Hill. That could help with its turnaround.
What does this mean for Nike stock?
Earlier this year, Nike stock traded below 20 times earnings for the first time in over a decade. It's trading at a price-to-earnings (P/E) ratio of 23 now, so it's not as cheap as it was, but it's still well below where shares have typically traded.
NKE PE Ratio data by YCharts.
This valuation is why an investor such as Ackman would be attracted to Nike stock. What's important for investors is that Hill doesn't necessarily need to do anything spectacular here. Modest earnings growth, coupled with ongoing dividend payments and share repurchases, could boost returns for Nike stock above the average for the S&P 500.
But to be clear, that earnings growth is crucial for Nike, and it likely won't come this year. Remember, when Donahoe called fiscal 2025 a transition year for Nike, he wasn't referring to upper management. He was referring to the business as it resets inventory and tries to improve marketing. The company consequently expects a near-term dip in sales and a larger drop in profits.
Hill hasn't even started yet at Nike. So any ideas he has for improving the business will need time to be implemented. Therefore, investors shouldn't expect positive signs of a turnaround for some time yet. That said, Nike is making an intriguing move by hiring a new CEO who's a longtime company insider. It could be the move that brings Nike back for the long term.
