Some analysts are questioning Nike's leadership as downbeat forecast sends stock toward biggest drop ever

MW Some analysts are questioning Nike's leadership as downbeat forecast sends stock toward biggest drop ever

By James Rogers and Bill Peters

'Management credibility is severely challenged and potential for C-level regime change adds further uncertainty,' Stifel analysts say

As shares of Nike Inc. on Friday headed toward their biggest drop ever following the sneaker maker's pessimistic outlook a day earlier, Wall Street analysts were retrenching - with some even questioning the company's management.

Nike shares $(NKE)$ were down 20.6% on Friday as the stock was hit with multiple downgrades from firms like Stifel, Morgan Stanley and UBS. If shares close down more than 19.46%, it would mark Nike's biggest one-day percentage decline on record.

Jim Duffy, an analyst at Stifel, said in a research note Thursday that Nike was asking investors to place their faith in newer, unproven sneaker and clothing styles amid wobbly demand - straining confidence in the company's leadership in the process.

"Management credibility is severely challenged and potential for C-level regime change adds further uncertainty," he wrote.

Nike plans to roll out an array of new products, and is trying to do so more quickly, to counteract reluctance from inflation-battered consumers. But over at UBS, analyst Jay Sole had his own reservations about the company, and cut his per-share profit estimates for its next three fiscal years.

"Our key conclusion is there will be no quick rebound for Nike's earnings," Sole said in a research note on Friday. "We believe Nike is embarking on what will be a multiyear reset of its business in order to return to healthy top-line growth rates."

He added: "Our base case top-line forecast depends on Nike successfully developing new innovative products, but there is no guarantee this will happen."

Speaking on a conference call to discuss Nike's fourth-quarter results Thursday, Chief Executive John Donahoe said the company saw strong gains in performance products, although this was more than offset by declines in Nike's lifestyle segment. Those declines, he added, had "a pronounced impact" on Nike's digital results.

"These factors when combined with increased macro uncertainty and worsening foreign exchange have caused us to reduce our guidance for [fiscal-year] 2025," Donahoe said.

"NKE's 4Q24 print was very choppy, and the challenges facing the company are clearly more impactful than we (or management) expected," wrote Wedbush analyst Tom Nikic in a note released Friday. "After the company missed Q4 sales and meaningfully cut FY25 guidance, shares are likely to open meaningfully lower on Friday."

Related: Nike wants to sell fewer classic sneakers, roll out more new ones in bid to revive demand

"We doubt many investors will view this as a 'buy the pullback' event, and we think NKE shares are headed for a stay in the proverbial penalty box until new product innovations actually start to manifest themselves and management regains investor trust," Nikic said. "We remain at Outperform due to our expectation that NKE will eventually 'figure it out,' but our conviction in our thesis has certainly taken a hit." Wedbush lowered its Nike price target to $97 from $115.

Analysts say that that Nike is entering a period of transition.

"FY25 will be a transitional year with significantly softer performance than we anticipated and what NKE planned 3 months ago," wrote Raymond James analyst Rick B. Patel in a note released Friday. In particular, Patel cited weakness in lifestyle products, worsening global macro headwinds and a foreign-exchange hit.

Related: Levi's is seeing growing demand for looser fits. This is what it means for Lululemon and Nike

"One could argue Nike kitchen-sinked FY25, but we don't have confidence on upside to revenue (most critical factor) given increasingly tough macro," Patel added, pointing to widespread reports of consumer softness from the likes of Levi Strauss & Co. $(LEVI)$, Walgreens Boots Alliance Inc. $(WBA)$ and General Mills Inc. $(GIS)$ The analyst also cited unfavorable channel mix and China volatility. Raymond James downgraded Nike to market-perform from outperform.

KeyBanc Capital Markets analyst Ashley Owens also expects fiscal-year 2025 to be a transition year for Nike as the company navigates the pullback of top franchises for life-cycle management, balances its wholesale and direct-to-consumer channels, kickstarts product-newness and innovation initiatives, and invests in brand marketing.

"We think the above dynamics coupled with a challenging macro will continue to pressure results for the next couple of quarters," she said.

However, Owens noted Nike's new "Speed Lane" priority to accelerate product creation and its goal of doubling the business contribution from new products by the end of fiscal 2025.

"Additionally, NKE noted headcount actions are complete, and looks to other areas for savings, planning to reallocate $1B to invest in consumer-facing activities in FY25 to help support top line," the analyst added. "Though channel-mix shift and franchise [management] will challenge the next few quarters, we think balancing product offerings, channels, and price points could help NKE be more competitive [long term]."

KeyBanc Capital Markets maintained its sector-weight rating for Nike.

Related: Nike stumble trips up athleisure sector

During the fourth-quarter conference call, Nike CEO Donahoe said that the company is harnessing Speed Lane and its Bowerman Footwear Lab to accelerate design, as well as digital tools to speed up development. The athletic-wear giant is also working with manufacturing partners to speed up product testing and production, he added, and has already accelerated half a dozen models through the new capability.

Of 40 analysts surveyed by FactSet, 22 have an overweight or buy rating, 15 have a hold rating and three have a sell rating on Nike.

Related: Levi's wants to sell a 'denim lifestyle' directly to consumers. Wall Street needs more convincing.

Nike shares are down 31.1% in 2024, compared with the S&P 500 index's SPX gain of 15%.

-James Rogers -Bill Peters

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June 28, 2024 15:37 ET (19:37 GMT)

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