Billionaire Bill Ackman bets big on Nike. Down 57%, is the sportswear stock ready for a comeback?

Nike (NKE 0.04%) 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 surge in 2022, revenue growth slowed for seven straight quarters, bottoming out with a 10% decline this summer.

Along the way, Nike stock has fallen 57% from its 2021 peak, ceding significant market share and mindshare to upstart rivals such as At Holding and Covers‘ 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 technology rather than retail or consumer products, Donahoe seemed to lose sight of the company’s priorities, making tactical mistakes like abandoning valuable wholesale partners and directing marketing dollars toward Google searches instead of the kind of brand-building campaigns the company traditionally is. known for.

Nike brought in longtime company veteran Elliott Hill to right the ship, and Hill hit many of the right notes on his first earnings call, saying he aims to bring sports back to the center of the company and accelerate innovation, design, product creation and storytelling. .

Nike’s latest round of results indicates the business is still headed in the wrong direction, with fiscal second-quarter revenue down 8% to $12.3 billion and net income down 26% to $1.16 billion.

The company’s struggles and the sell-off of the stock present investors with a classic dilemma — whether to buy this blue chip stock on a dive or avoid it as it tries to revamp its business. After all, not all twists turn. Under Armour 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 holding in the stock to 16.3 million shares, which is currently worth about $1.25 billion.

Image source: Getty Images.

Why did Ackman buy Nike

Ackman has not directly addressed his purchase of Nike shares, but the billionaire is known as a contrarian and has previously bet heavily on distressed consumer brands. For example, Ackman pitched in Chipotle stock as the company dealt 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 appears to be trying to apply the same playbook to Nike. News that Donahoe would be leaving came late in the third quarter, so it’s unclear whether that triggered Ackman’s additional purchases or whether he bought the stock beforehand. According to New York PostAckman supported bringing in Hill as Donahoe’s replacement.

The turnaround strategy is taking shape

Nike stock was initially up on the earnings report when its second-quarter numbers topped estimates, but investors were disappointed by the outlook.

Hill outlined the key initiatives the company is taking to turn the business around, some of which will impact results over the next few quarters. Noting that the brand has become too promotional, Hill sees reclaiming its premium status as key to its recovery, and that means charging full price rather than leaning on discounts. Because of this strategy, the company plans to liquidate excess inventory in less profitable channels over the coming quarters, and it is winding down its orders for the summer.

This fits with Hill’s intention to return Nike to a “pull market”, meaning customer demand drives the business rather than aggressive marketing. Hill also acknowledges that Nike’s product must first work for athletes before it can work for consumers as he diagnosed the previous challenges, saying, “We lost our obsession with sports. Going forward, we want to lead with sports and put the athlete at the center of any decision.”

The new Nike boss was able to hit the ground running because he already has relationships with Nike’s top retail partners, sports leagues, sponsored athletes and other key stakeholders, and he appears to be a good choice to restore the company to its historic leadership position. in the industry.

Is Nike a buy?

The management’s guidance made it clear that the turnaround will take time, and the results in the second half of the financial 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 material decline in profits, although the company did not provide bottom-line guidance.

While that forecast disappointed investors and erased the stock’s initial gains on the report, Nike appears to be on the right track here. It needs to regain the shelf space it has lost in recent years and the premium branding it has relinquished.

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 huge upside potential if Nike can execute Hill’s strategy.

Investors will have to be patient, but at the current depressed price, Nike stock has the opportunity to double or better over the next few years as the turnaround story unfolds.