Nike Sees Growing Pains Ahead. The Bears Are 'in Control.' -- Barrons.com

Dow Jones12-21

By Sabrina Escobar

Nike's new CEO Elliott Hill had a sobering message for investors Thursday: Improving the sportswear business is going to take time and money.

Hill said that in the roughly two months since he took the helm, the company has already implemented several initiatives to right the ship, while others were on their way. That includes reducing markdowns, clearing out old inventory to make way for new merchandise, and investing in marketing.

These efforts are "best for the health" of Nike's brand and business, Hill said. But he added: "I recognize that some of these actions will have a negative impact on our near-term results."

While Nike's results for its fiscal second quarter, the three months through Nov. 30, were better than feared, its forecasts for the third quarter fell short of expectations. Hill warned the turnaround effort would take a toll on profitability and sales growth.

Markets weren't loving that caveat. Nike stock was down 0.6% to $76.66 in afternoon trading Friday, while the S&P 500 was up 1.6%. The stock has fallen 29% this year.

Given Hill's sobering assessment of the outlook, the "bears are likely in control of the narrative," at least until the next earnings report, noted TD Cowen analyst John Kernan. Kernan rates the stock at Hold with a target of $69 for the price.

Analyst sentiment did lean on the negative side. For instance, Telsey Advisory Group analyst Cristina Fernández downgraded the stock to Market Perform from Outperform, cutting her price target to $80 from $93. While Fernández still sees a path for a turnaround at Nike, she doesn't see it happening quickly.

"We lack clarity around the length of time it will take to clean up inventory, introduce significant product newness, rebuild wholesale partnerships, and elevate Nike digital by reducing promotions in order to return Nike to growth," she wrote in a research note.

Adrienne Yih, an analyst at Barclays who has an Equal-Weight rating on the stock, agreed that the near term seems murky for Nike. "We would rather chase a stock in recovery mode versus stand at the precipice of the unknown," she wrote.

The company faces various challenges, as Hill acknowledged at the company's earnings call on Thursday. Competition from other sportswear brands is still fierce, demand in China and the U.S. -- two of Nike's largest markets -- is still under pressure, product innovation has lagged, and repairing the wholesale partnerships severed under the tenure of the company's previous CEO will hardly be straightforward.

To top it all off, the stock isn't even particularly cheap, trading at roughly 28 times the per-share earnings expected for next year. The S&P 500 was trading at about 22 times.

Still, bulls were undaunted by the update, arguing that the challenges Nike is facing were well-known and that fiscal 2025 had been expected to be a year of transition for the company.

"NKE appears in the midst of a return to what made it special: outspending competition with compelling storytelling, R&D, and partnering with others for distribution," wrote Simeon Siegel, an analyst at BMO Capital Markets. "Turns take time but if it sticks to this road, we expect improvement and reiterate our Outperform."

Both analysts who are positive on the stock and those who are skeptical agreed that Hill is the right man to lead the turnaround and that his priorities are well founded. "We like CEO Hill and applaud his vision," wrote Randal Konik, an analyst at Jefferies who rates the stock at Hold.

Still, he said, the previous leadership team's mistakes have left Nike vulnerable. While investors may be tempted to "Just Do It," snapping up the stock right away, Konik believes waiting a few months might be a smarter move.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

 

(END) Dow Jones Newswires

December 20, 2024 13:39 ET (18:39 GMT)

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