Will Nike Investors' Frustrations End Anytime Soon?

If you're a Nike (NYSE: NKE) investor, it wouldn't be surprising if you had a growing sense of frustration owning the stock. After all, it's well off the highs of over $170 a share it hit back in November 2021, and down more than 30% over the past year. The stock has barely budged the past five years, and its shares were sinking once again after its latest earnings results.

Let's take a closer look at Nike's recent earnings to see if there are any signs of a turnaround in sight for the iconic sneaker and apparel maker.

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Sales continue to decline

Nike CEO Elliott Hill has only been on the job for under six months, and finds himself inheriting a difficult situation, looking to turn the company around. Former CEO John Donahoe showed his lack of experience running an apparel brand by eschewing innovation and thinking the company could solely rely on its brand reputation. He leaned heavily into its classic footwear segment, which includes such brands as Air Jordan and Air Force 1. Meanwhile, he shunned wholesale relationships in order to focus more on direct selling.

His plan didn't work, and Nike overproduced its classic brands, leading the company to become heavily promotional to clear inventory. At the same time, its other segments lacked a sense of newness.

Hill is now trying to reverse the damage that has been done through his "Win Now" action plan. The company is trying to rightsize its classic footwear segment, while turning toward innovation and freshness in its sports performance category to lead the way. It's investing heavily in both short-term and long-term innovation, while looking to add new models, assortments, colors, and materials.

The company is also pulling back on promotions within its direct channels, instead looking to return to a full-priced brand. It is also looking to develop a better relationship with its wholesale partners. Going forward, it will look to balance direct and wholesale selling, while initially focusing on the U.S., China, and U.K. to drive growth.

However, these changes will take time to make a positive impact, and in the near term, will cause some pain, which both Nike's fiscal Q3 results and its guidance reflect.

For its most-recent quarter, Nike saw revenue fall 9% to $11.3 billion, with Nike brand revenue also down 9% to $10.9 billion. Nike Direct revenue dropped even more, down 12% to $4.7 billion. Digital sales led the way lower.

The Chinese market was a particular weak spot, with revenue down 17% in the quarter to $1.7 billion. It said this is the market where it has been most proactive in cleaning up its inventory.

North America was its strongest region, with sales down only 4% to $3.1 billion. North American apparel sales, meanwhile, were solid, seeing growth of 7%, but its much larger footwear segment saw sales sag 9%.

To clear inventory, Nike also had to discount more heavily in the quarter, which led to a 330-basis-point decline in its gross margin to 41.5%. This led to its earnings per share (EPS) falling faster than its revenue decline. EPS plunged 30% in the quarter to $0.54.

Meanwhile, analysts expect gross margins see even more pressure in fiscal Q4, hurt by tariffs and restructuring charges, and are looking for a 400-basis-point to 500-basis-point decline for the quarter. In addition, markdowns could increase at Nike factory stores, and will likely provide higher wholesale discounts to help liquidate old inventory.

At the same time, management expects fiscal Q4 revenue to decline in the mid-teens range, driven by a number of headwinds, including geopolitical uncertainty, tariffs, volatile foreign exchange rates, and tax regulations.

Additionally, the company's push to position Nike Digital as a full-price platform, is expected to have a negative impact on traffic over the coming year. It expects digital traffic to be down double digits in fiscal 2026 (ending May 2026).

Image source: Getty Images.

When will a turnaround take hold?

It's going to take a while for Hill's actions to kick in, and in the near to medium term, there will be some pain as a result. However, these actions are necessary to try and restore the health of the Nike brand and get the company back on track.

My best guess, given the commentary, is that it will take at least a year for Nike to begin to see the fruits of its actions and get the company headed in the right direction with positive sales and improving gross margins. However, the market tends to be forward-looking, so I think the stock could start to rally well ahead of that if it can show signs of progress.

As such, while I wouldn't rush to buy the stock right now, I think it is a stock you want on your radar, since you may want to keep a close eye on the company's turnaround.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool has a disclosure policy.