Buying the Dip in Nike's Stock Could Be a Mistake

Nike (NYSE: NKE) beat earnings and revenue expectations in its fiscal third quarter. But despite this win, shares dropped sharply after the report. Why were investors spooked? First, expectations were low, so beating those low expectations wasn't a huge achievement. But the biggest reason for the stock's decline is likely management's outlook. In short, it sounds like fiscal Q4 will be even worse than fiscal Q3.

Is this pullback a buying opportunity for investors, or is it a warning sign to stay away?

Nike is still in reset mode

Hill and his team are trying to pull the company out of a rut caused by strategic decisions made in previous years. During the COVID pandemic, the company leaned heavily on the latest styles while pulling back from key wholesale partnerships. This worked in the short term but ultimately backfired over the longer term. Today, Nike is working to rebuild those relationships and clear excess inventory, even if it comes at the cost of profitability.

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The company's disappointing state is evident in its quarterly results. Sure, the sportswear giant reported earnings of $0.54 per share, well ahead of the $0.29 analysts were expecting. But those earnings were down from $0.77 in the year-ago quarter. Additionally, revenue declined 9% year over year to $11.3 billion.

Nike CEO Elliott Hill didn't sugarcoat it. During Nike's fiscal third-quarter earnings call, he said he was "not satisfied" with the company's results.

Capturing some specific areas of trouble in the quarter, Nike's direct-to-consumer sales fell 12% year over year, wholesale revenue declined 7%, and gross profit margin contracted 330 basis points to 41.5% due to heavy markdowns.

A cautious forecast

Management's commentary about its expectations for the current quarter certainly didn't help calm investors. During the call, Nike chief financial officer Matt Friend said the company expected the short-term headwinds from its strategic efforts to be even worse in fiscal Q4.

Making matters trickier, the negative impact on its business is expected to be magnified by "several external factors that create uncertainty in the current operating environment, including geopolitical dynamics, new tariffs, volatile foreign exchange rates, and tax regulations, as well as the impact of this uncertainty and other macro factors on consumer confidence," Friend explained.

Specifically, Nike guided for fourth-quarter revenue to be down "in the mid-teens range, albeit at the low end." Further, management forecast its gross profit margin to be down 400 to 500 basis points year over year.

Ouch.

The sidelines might be the best place to be

Nike has built one of the world's most iconic brands, but that doesn't mean the stock is a buy just because shares have fallen recently. Right now, the company is in the middle of a strategy reset, with no clear signs of stability. Revenue is still declining, margins are under pressure, and management itself is urging patience in its turnaround plan, which is ironically named "Win Now."

None of this is to say that Nike can't eventually get back on track. For now, however, there's arguably too much uncertainty to buy shares. Investors looking for steadier footing may be better off waiting to see whether this turnaround gains traction before stepping in.

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Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool has a disclosure policy.