Our turnaround will be challenging and will depend on sport

On December 26, 2024By Littum

Nike ( NKE ) is taking a step in the right direction under new CEO Elliott Hill.

The footwear brand released its financial results for the second quarter on Thursday after the market closed. Its revenue of $12.35 billion beat expectations of $12.13 billion, though still down from $13.39 billion from a year ago.

Adjusted earnings per share clocked in at $0.78, compared with estimates of $0.63, but also below last year’s $1.03.

The earnings report is the first under Hill, who is 60 days into his role as chief executive but spent his entire career at the company before retiring in 2020.

Hill kicked off the earnings call by sharing that he believes Nike “lost” its “obsession with sports.”

“We will lead with sport and put the athlete at the center of every decision,” he said.

His team plans to reinvest in brand storytelling and “build an integrated marketplace across NIKE Direct and wholesale.

Read more: Why Walmart won the 2024 Yahoo Finance Company of the Year award

Added Hill, “This won’t be easy, but we’re up for the challenge.”

“The recovery will be a multi-year effort, but Hill looks to steer Nike back to its core, back to being Nike,” said John Nagle, chief investment officer at Kavar Capital Partners, which owns Nike stock.

On Friday, Cristina Fernández of Telsey Advisory Group downgraded shares to Market Perform from Outperform, citing that the turnaround plan will “take longer to execute, require greater investment in areas such as brand marketing, and result in lower sales and profitability over the next 12 months ,” adding that it generally lacks “clarity” about how long that will take.

Nike shares fell about 4% in premarket trading on Friday following the cautious outlook as analysts expect near-term margin pressure.

In the past year, Nike shares have fallen more than 36% as the footwear brand lost focus on its products and relationships with distribution partners and now has to contend with the rise of On Holding ( ONON ), Skechers ( SKX ) and Hoka ( DECK ) sneakers.

Here’s what Nike posted in the fiscal second quarter compared to Bloomberg consensus estimates:

Adjusted earnings per stock: $0.78 compared to $0.63
Income: $12.35 billion compared to $12.13 billion
Nike Brand Revenue: $11.95 billion compared to $11.64 billion

In the quarter, gross margin fell 100 basis points to 43.6%, primarily due to discounts and channel mix changes. Product input costs fell, as did inventory and logistics costs.

Its revenue from the Nike brand came in at $11.95 billion, down 7% year over year across all geographies.

Revenue from its direct-to-consumer business, Nike Direct, fell 13% on a reported basis, primarily due to a 21% decline in its digital business and a 2% decline in Nike-owned stores. Wholesale revenue fell 3% year over year.

CFO Matthew Friend said the company plans to reduce excess inventory to make room for seasonal products and new products for next fall and holiday 2025. Nike Digital will turn to a full-price model with less promotional activity.

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As a result, summer order books will be down compared to the previous year, Friend outlined.

“In addition to cleaning up inventory, there’s definitely an opportunity for margin rate benefits within Nike Direct to run, albeit a smaller, but a healthier and more profitable business,” Friend said, adding that it has “captured the demand and competed with our wholesale partners instead of creating and growing demand for our brands.”

Hill said Nike plans to invest in its partners and its sales team will “need to earn every open-to-buy dollar,” with plans to provide marketing support. That could boost JD Sports ( JDSPY ), Dick’s Sporting Goods ( DKS ) and Foot Locker ( FL ).

Next quarter’s gross margin is expected to decline by approximately 300 to 350 basis points as Nike looks to “cleanse and reset the marketplace,” Friend said.

“I think we have to accept that it’s going to take some time,” Simeon Siegel of BMO Capital Markets told Yahoo Finance’s Morning Brief ahead of earnings. “The action here is, are you going to believe in hope or are you going to be held down by numbers? And I think the reality is for a company like Nike, hope can be powerful.”

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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at [email protected].

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