The market is excited about a turnaround story.
The market gave Nike (NKE 1.58%) an enthusiastic thumbs-up last week when it announced the return of longtime executive Elliot Hill to lead the company in a turnaround. Hill left the sporting apparel giant in 2020, but as a longtime Nike veteran, he’s well-acquainted with the intricacies of the brand, and his return is inspiring confidence in a rebound. Let’s see how this could play out.
Losing the sneaker wars
Nike’s been under pressure for a while, but it got much worse in fiscal 2024 (ended May 31). Fourth-quarter sales were down 2% year over year, and Nike Direct sales dropped 7%. Digital sales were down 10%, while wholesale was up 8%. That gives some insight into consumer behavior right now.
Management said it has already invested in its performance products, and that segment has increased by double digits. But the gains were more than offset by pressure in the lifestyle business. It’s guiding for a low-single-digit drop in revenue in fiscal 2025, with a high-single-digit drop in the first half of the year.
There appear to be two main issues: too much of a reliance on its direct channels, and losing touch with what its customer base wants.
Getting back to first place
I find it interesting that both Nike and coffee giant Starbucks are finding talent within their industries. They had both taken a chance on outsider CEOs with tech experience who were expected to bring their know-how to a different game. For Starbucks, it was Kevin Johnson, who came from Microsoft and Juniper Networks. Nike pinned its hopes for a digital transformation on John Donahoe, who came from ServiceNow and eBay. It’s now getting back to its roots and a CEO who knows it inside and out.
Although Nike has always been the company to beat in its industry, it might have to take a page from its small, higher-growth competitors to get back to growth. On Holding, for example, is crushing it with high growth and a huge opportunity. It has carved out a niche in premium products aimed at both the serious athlete and the affluent consumer.
Mass producer Skechers, I would point out, is also excelling right now, and for similar reasons. Even though it reaches a different population, it has refined its branding to reach its target. It also has a healthy omnichannel model with both wholesale and direct-to-consumer channels.
So part of what Hill needs to do seems pretty obvious. The first thing is to correct the wholesale distribution setup to have a stronger presence where fans are shopping. They may not be as loyal as Nike thought, and they’re shopping at stores like Foot Locker and Deckers Outdoor, comparing Nike to other brands. Expect this to be a big part of Hill’s new growth strategy.
Next is to define its customer and branding. Nike is an interesting example of a premium brand that appeals to many demographics. In general that’s a benefit, because fans are willing to pay for its products even if they’re not affluent. But it comes with the danger of a diluted brand. That’s why serious athletes are looking at other brands, which are more focused on performance.
At the same time, customers who can’t afford Nike’s prices amid high inflation might be switching down to brands like Skechers. Hill’s mission will involve refining its message to reach the many types of people who like to buy its products.
How fast will things change?
Hill knows Nike as well as anyone, and it should be easy for him to get back into the company and pick up where he left off. He has previously led teams that restructured the direct and wholesale channels and also helped strategize the company’s innovation model. A real rebound will take time, but investors should expect an update about a change of direction pretty quickly.
There are a few things in Hill’s favor even before he gets started. One is that management has already recognized the problems and implemented action to right them. It’s bringing some planned products launched forward by as much as a year to speed up innovation, and it has already scrapped its plan to ditch wholesalers. The rebound in performance products is a strong indication that the Nike team can make the proper adjustments to its products and see results fast.
Lower interest rates should also play to its favor, since those most affected by inflation might have more money to spend as the economy picks up.
How should investors play it?
Nike is the largest footwear and apparel company in the country, by far. It still tops the list of favorite brands among the masses, and no competitor, however fast it’s growing, is going to topple it in the near future.
The stock also pays a growing dividend that yields 1.7% at the current price. This itself could be worth quite a lot to an investor. The stock trades at a forward one-year P/E ratio of 24, which is a reasonable valuation.
In general when there’s flux, it’s prudent for investors to take a wait-and-see approach. However, investors who buy in now are likely to benefit long-term.
Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft, Nike, ServiceNow, Skechers U.s.a., and Starbucks. The Motley Fool recommends Foot Locker, On Holding, and eBay and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
