Nike (NKE -0.67%) has been through the wringer lately.
The world's largest sportswear brand is suffering through one of the most challenging periods in its history. Revenue has now fallen for three quarters in a row and those declines are expected to continue. After a post-pandemic spike in 2022, revenue growth decelerated for seven quarters in a row, bottoming out with a 10% decline this summer.
Along the way, Nike stock is down 57% from its peak in 2021, and it's ceded significant market share and mindshare to upstart rivals like On Holding and Deckers' Hoka brand.
Blame for the debacle was placed squarely on the shoulders of former CEO John Donahoe, who was ousted by the board in September. With a pedigree in tech rather than retail or consumer products, Donahoe seemed to lose sight of the company's priorities and made tactical errors like abandoning valuable wholesale partners and directing marketing dollars toward Google searches rather than the kind of brand-building campaigns the company is traditionally known for.
Nike brought longtime company veteran Elliott Hill in to right the ship, and Hill hit many of the right notes on his first earnings call, saying he aims to return sport to the center of the company and accelerate innovation, design, product creation, and storytelling.
Nike's latest round of results indicate that the business is still headed in the wrong direction with revenue in the fiscal second quarter down 8% to $12.3 billion and net income falling 26% to $1.16 billion.
The company's struggles and the sell-off in the stock present investors with a classic dilemma -- whether to buy this blue chip stock on the dip or avoid it while it attempts to revamp its business. After all, not every turnaround turns. Under Armour famously collapsed in the mid-2010s and has never recovered.
One investor betting on Nike's recovery is Bill Ackman, the billionaire head of Pershing Square Capital Management. In the third quarter, Ackman bought 13.2 million shares of Nike, bringing his total holdings in the stock to 16.3 million shares, which is worth about $1.25 billion currently.
Image source: Getty Images.
Why Ackman bought Nike
Ackman hasn't directly addressed his purchase of Nike stock, but the billionaire is known as a contrarian and has bet big on distressed consumer brands in the past. For instance, Ackman piled into Chipotle stock when the company was dealing with its E. coli crisis. Eventually, with the help of a new CEO, the brand overcame it, and the stock soared in the following years.
Ackman seems to be trying to apply the same playbook to Nike. The news that Donahoe would be leaving came late in the third quarter so it's unclear if that triggered Ackman's additional purchases or if he was buying the stock beforehand. According to The New York Post, Ackman supported bringing in Hill as Donahoe's replacement.
The turnaround strategy takes shape
Nike stock was initially up on the earnings report as its second-quarter numbers topped estimates, but investors were disappointed with the outlook.
Hill outlined the key initiatives that the company is undertaking to turn around the business, and some of the moves will impact results over the next few quarters. Noting that the brand has become too promotional, Hill sees recapturing its premium status as key to its recovery and that means charging full price rather than leaning into discounting. Due to that strategy, the company plans to liquidate excess inventory in less profitable channels over the coming quarters and it's scaling back its orders for the summer.
This fits with Hill's intention of returning Nike to a "pull market," meaning customer demand drives the business rather than aggressive marketing. Hill also recognizes that Nike's product needs to work for athletes first before it can work for consumers as he diagnosed the earlier challenges, saying: "We lost our obsession with sport. Moving forward, we will lead with sport and put the athlete at the center of every decision."
The new Nike chief was able to hit the ground running because he already has relationships with Nike's top retail partners, sports leagues, sponsor athletes, and other key stakeholders, and he seems to be a good choice to restore the company to its historical leadership position in the industry.
Is Nike a buy?
Management's guidance made it clear that the turnaround is going to take time, and results in the fiscal second half of the year will be weak. For the third quarter, Nike is targeting a revenue decline in the low double-digits and gross margin compression of 300 to 350 basis points, which will lead to a substantial decline in profits, though the company didn't give bottom-line guidance.
While that forecast disappointed investors and erased the stock's initial gains on the report, Nike seems to be on the right track here. It needs to reclaim the shelf space it's lost in recent years and the premium branding it's ceded.
The stock doesn't look cheap based on current earnings, but profits are well below what they could be, and we could see a return to profit growth within a year. Given the 57% pullback in the stock, there's a lot of upside potential if Nike can execute Hill's strategy.
Investors will have to be patient, but at the current beaten-down price, Nike stock has the makings of a double or better over the next few years as the turnaround story plays out.
