To The Moon

$Nike(NKE)$

Nike Releases Quarterly Earnings

Nike just released its latest quarterly results after the market closed. Initially, the stock was up 4%, but as of the time of this video, it has dropped by around 4-5% following guidance provided during the earnings call. Before the guidance was given, the stock was in positive territory, raising some questions because, frankly, this was not a strong quarter.

Turnaround Expectations

For those who expected this to be the turning point, it was never going to happen. Even the CEO acknowledged three months ago that the turnaround would take longer than anticipated. In my opinion, there are better investment opportunities in the market today, even within the same industry. For example, On Holdings, one of Nike's major competitors in footwear, is currently growing faster and trading at a lower valuation.

Reasons for Investing in Nike

That said, I understand why some investors might still buy Nike—perhaps as a defensive play due to its small dividend or as a bet on its long-term turnaround. I'm not against turnaround stories—I hold a few in my portfolio—but Nike's situation doesn't seem particularly compelling to me at the moment. Of course, I could be proven wrong.

Nike's Valuation Today

Interestingly, Nike is more expensive today than it was five years ago or even a year ago, despite the stock’s decline. This is due to future projections. Looking at valuation metrics, Nike’s forward P/E ratio currently sits at 41, while its trailing twelve-month P/E is at 22.6. This highlights an important lesson—simply looking at P/E ratios isn't enough; investors must understand the business behind the numbers.

Stock Performance Overview

In terms of stock performance, Nike has dropped 50% over the last three years. It has previously experienced multiple 30-40% declines. Year-over-year, the stock is down 32%, and year-to-date, it has fallen 16%—potentially closer to 20% after hours. The company's market cap is now just under $100 billion.

Key Earnings Figures

Now, let’s break down some key figures from the quarter and insights from the management's earnings call. While there were some beats and minor misses, the results overall were underwhelming. Notably:

• Revenue in China missed expectations by 5.6%.

• Revenue from APAC and Latin America fell short by 2.6%.

• Gross margin missed by 29 basis points and declined 326 basis points year-over-year.

• Total revenue for the quarter was down 99.3% year-over-year.

• EPS dropped 44.9%.

Q4 Guidance Overview

For the upcoming Q4, Nike provided the following guidance, which was a double miss. Their statement emphasized that the forecast reflects their best assessment based on current available data, including the impact of tariffs.

Revenue & Margin Expectations

Nike expects Q4 revenue to decline in the mid-teen percentage range, albeit at the lower end. This projection factors in unfavorable shipment timing in North America and a two-percentage-point negative impact from foreign exchange headwinds. Additionally, Q4 gross margins are expected to decline by approximately 400 to 500 basis points, including restructuring charges.

Operating Expenses & Other Financial Metrics

The company anticipates Q4 SG&A expenses to grow in the low to mid-single digits, incorporating restructuring charges from the prior year. Despite tight expense management, Nike plans to increase investments in key priorities, particularly demand creation. Other income and expenses, including net interest income, are expected to range between $45 million and $55 million. The full-year tax rate is projected to be in the mid-teen percentage range.

Footwear and Apparel Performance

Zooming out to the broader performance trends, footwear revenue is down 11.7% year-over-year, apparel is down 2.9%, and equipment has declined by 2.1%. The global brand division saw a 33% increase, but it remains a small portion of the overall business. Meanwhile, Converse revenue fell 18.2% year-over-year.

Market Reaction & Future Outlook

Footwear has been struggling for four consecutive quarters, showing clear signs of slowing demand. The key question now is how much further it can decline. If the stock sees a small rebound tomorrow, it could indicate that the market believes this is the bottom, but that remains to be seen in the upcoming quarters.

Regional Revenue Breakdown

• North America: Revenue down 4.1%

• Europe, Middle East, and Africa: Revenue down 10.4%

• Greater China: Revenue down 16.8% (Nike remains the top brand, but competition is much stronger than in previous years)

• Asia Pacific & Latin America: Revenue down 10.7%

EBIT Performance Decline

A similar trend is visible in EBIT (Earnings Before Interest and Taxes), with significant declines across regions:

• North America: Down 21.2%

• Europe, Middle East, and Africa: Down 34.6%

• Greater China: Down 41.7%

• Asia Pacific & Latin America: Down 26.5%

• Converse: Down 60.2%

Nike's EBIT has been consistently declining since Q4 2023, reinforcing the ongoing struggles in its turnaround efforts. The upcoming quarters will be critical in determining whether the business can stabilize or if further challenges lie ahead.

Nike's Growth Stagnation

Since 2020, Nike hasn’t experienced significant growth. Now, let's touch on a few key points from the earnings call, starting with the company’s product portfolio transition.

Product Portfolio Transition

Nike is shifting its focus toward sport performance products and innovation. The company aims to increase the percentage of new products in seasonal assortments while reducing reliance on classic footwear franchises, particularly the Dunk, which is set for a double-digit unit reduction in fiscal year 2026.

Nike Digital Repositioning

Nike plans to integrate its digital business more seamlessly within the broader marketplace. A key part of this strategy includes reducing promotional activities and markdown rates—a logical move to protect brand value. Frequent sales and promotions can dilute Nike’s premium brand perception, as customers begin to wait for discounts rather than buying at full price. To counter this, Nike will shift closeout inventory liquidation to factory stores and expects digital traffic to decline in fiscal 2026 as it builds organic traffic over time.

Inventory Management & Marketplace Cleanup

Nike intends to tighten product buys for its digital segment to support full-price sales. Factory stores will play a bigger role in clearing out markdown inventory, while aged inventory will be addressed through wholesale partners via returns, supply reduction, and discounts. These actions will continue into the first half of fiscal 2026, signaling further short-term challenges ahead.

Wholesale Growth Strategy

Nike believes wholesale will return to growth once new product flow, brand engagement, digital strategy, and overall marketplace health improve. The company reiterated that the turnaround will take longer than initially expected. Last quarter, management emphasized that Q4 would see the most significant impact from its “Win Now” initiatives, and they still believe this to be true. However, Q4 is also expected to reflect the peak of revenue and margin headwinds, which should begin to moderate from there.

Is This the Bottom for Nike?

This could be the lowest point for Nike, but only time will tell. The bar is currently set quite low, and any positive developments could push the stock higher. However, headwinds will persist into 2026, particularly as Nike continues liquidating inventory through its usual channels. Management remains confident in the strategy and promises transparency as they gain greater visibility into fiscal 2026.

Does Nike’s Valuation Make Sense?

Looking at Nike’s current trading levels—similar to the March 2020 pandemic crash, August 2024’s Black Monday, and even just a month ago—it does seem justified. The company faces greater uncertainties, increased competition, and lacks positive momentum. However, Nike remains an iconic global brand, recognized worldwide, whether through genuine or counterfeit products.

The Bigger Investment Question

Nike must now prove to investors that it can reignite growth both on the top and bottom lines. But why invest in Nike over a competitor like On Holdings? If you want exposure to footwear, athletics, and apparel, why not choose a company that is gaining market share, growing faster, and is currently cheaper?

Is the main reason Nike’s small dividend? Is it purely a defensive play or a bet on the turnaround story? Could the stock double in the next few years? Possibly—but why take on the uncertainty when competitors offer similar or better prospects without the same risks?

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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