Nike (NKE -0.68%) shares were running on a treadmill after the athletic apparel company reported its fiscal second-quarter results last week. While the company was able to top estimates, its new CEO indicated that a turnaround is going to take some time. The stock is trading down nearly 30% year to date as of this writing.
Let's take a closer look at Nike's fiscal Q2 results, its new CEO's turnaround plans, and when (or if) the stock may be about to rebound.
Declining sales and turnaround plan
While Nike was easily able to top muted expectations for the quarter, new CEO Elliott Hill lamented that the company was failing to deliver newness and tell inspiring stories, which was leading to the brand becoming way too promotional. He noted that for its direct sales, only about half its sales were at full price. In addition to hurting the top line, this has also been eating into the company's gross margin and negatively impacting profits.
As a result, Nike's sales dropped 8% year over year to $12.35 billion in the period ended Nov. 30, although that topped the $12.12 billion analyst consensus. Nike brand revenue fell 7% to $12 billion, while Converse sales plunged by 17% to $529 million. By selling channel, Nike direct revenue sank 13% to $5 billion, while wholesale revenue decreased by 3% to $6.9 billion.
Gross margin declined by 100 basis points to 43.6%, dragged down by its discounting. It was able to lower its selling, general, and administration (SG&A) costs by 3% even after increasing marketing expenses as it reduced overhead costs by 5%.
Adjusted earnings per share (EPS) plummeted 24% to $0.78, but came in well ahead of the $0.63 analyst consensus.
When brands are struggling, one metric to pay attention to is inventory, as elevated inventories tend to lead to further markdowns and more gross margin pressure. Nike's inventories were flattish year over year. With its sales down 8%, this is still a problem area.
Nike expects revenue to decline by low double digits in fiscal Q3. Gross margin, meanwhile, is expected to decrease by between 300 and 350 basis points. In addition, it expects headwinds to worsen in Q4.
Hill will look to transition Nike Digital back to a full-price model and try to reduce its dependency on promotions. This is never an easy task, as consumers often become accustomed to sales and basically need to be reconditioned. Meanwhile, the company will put an emphasis back on sports and product innovation. It will also look to invest in both brand and sport-specific marketing.
Image source: Getty Images.
Can the stock rebound in 2025?
No one is more familiar with Nike than Hill, who had been with the company in various roles since 1988 until he left in 2020. He is trying to return Nike to its roots and unwind the mistakes that were made under former CEO John Donahoe, who emphasized direct selling with a focus on classic Nike brands without much emphasis on innovation. Hill will now shift Nike's focus back to product innovation, while also trying to restore wholesale relationships.
While Hill's plan looks like the correct path, it is going to take time to play out. The company still needs to clear inventory and then bring in new innovation that will draw back customers and lead to full-price sales. Being heavily promotional dilutes brands, so this will take time to rebuild.
Nike stock now trades at a forward price-to-earnings (P/E) ratio of about 25 times next fiscal year's estimates, which is one of the cheaper levels it has traded at over the past few years.
Data by YCharts.
It will take a while for Hill to help turn around Nike and it likely won't happen this fiscal year, which ends in May 2025. However, if the company is showing signs of a turnaround, the stock should rebound ahead of this, as markets tend to be forward-looking.
As such, I think the stock could look more interesting toward the back half of 2025 given the likely time it will take Hill to implement his plan and for it to actually bear fruit. However, investors should consider buying any dips in the interim if the market gets impatient.
