To The Moon

$Nike(NKE)$

Nike recently released its financial results after the markets closed on March 20, 2025, and the report was a stark disappointment, marking one of the worst quarters I've seen for a company with such a strong track record like Nike. To see such underperformance in consecutive quarters is rare, especially for a brand with Nike's historical strength. I'm glad I warned investors against buying this stock a few months ago and reiterated it again about a month ago, as Nike's stock dropped over 6% in after-hours trading following these poor results.

In this article, I'll break down Nike's numbers and explain why the company's performance isn't favorable for investors. I'll also update my stance on Nike stock to see if, at this lower price, it makes sense to consider it a buying opportunity.

Earning Overview

Nike's financials show declines across the board. Third-quarter revenue fell 9% to $11.3 billion. Nike Direct revenue dropped 12% to $4.7 billion, while wholesale revenue was down 7% to $6.2 billion. Gross margin, which had been holding up relatively well despite falling sales, also decreased by 330 basis points to 41.5%. This decline is largely attributed to a shift in strategy by the previous CEO, who pushed for greater emphasis on Nike Direct and downplayed wholesalers. That approach has backfired, opening up opportunities for competitors to capture customers who found limited Nike inventory in stores and chose other options.

Fundamental Analysis

Despite the current CEO, Elliot Hill, expressing confidence in the company's progress, I don't share that sentiment. Sales are declining, margins are falling, and all of this is happening despite increased spending on advertising and promotions. There’s a clear disconnect between Nike’s efforts and consumer response.

Nike’s demand creation expenses, including brand marketing, rose by 8% to $1.1 billion. The fact that sales are dropping despite increased marketing spend is concerning, signaling that the company's usual appeal is weakening.

Nike's diluted earnings per share dropped 30% to 54 cents, and the company’s struggles are being felt globally. North America saw a 4% revenue decline, Europe, the Middle East, and Africa fell 10%, Greater China dropped 17%, and Asia-Pacific and Latin America fell 11%.

Even though Nike's stock dropped in after-hours trading to around $68 per share, the intrinsic value I calculated for the stock is $60 per share. A month ago, I rated it as a "hold" and advised against buying at higher prices. Despite the stock's drop, it’s still trading above its intrinsic value, and with a forward price-to-earnings ratio of 31, the stock seems overpriced based on its current performance.

Guidance

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.

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.

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.

Free Cash Flow

As of the most recent available data, Nike's free cash flow remained strong, despite the challenges in its core operations. For example, in its last earnings report, Nike reported a decline in sales, but still generated a positive cash flow, largely due to its efficient supply chain management, cost-control measures, and strong brand equity. Historically, Nike has maintained solid free cash flow, which allows it to reinvest in the business, pay down debt, and return value to shareholders via dividends and share buybacks.

However, despite the strength in its free cash flow, there are concerns that Nike's struggles with declining sales and margins could eventually affect its cash flow in the future. If the company's sales trends continue downward, its ability to generate strong free cash flow could be impacted.

Nike’s ability to maintain strong cash flow will be crucial in determining whether the company can weather its current challenges and eventually turn things around. As of now, despite the short-term difficulties, its free cash flow remains a positive aspect of the company’s financial position.

Risks and Challenges

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.

Declining Sales and Revenues

Revenue Declines: Nike's recent earnings report showed a significant drop in revenue across key regions, including North America, Europe, Greater China, and Asia-Pacific. This indicates a weakening demand for its products and suggests that the brand may be losing its appeal or facing stronger competition in some markets.

Global Sales Slump: Even though Nike has a strong global presence, the widespread decline in revenue across diverse markets signals potential issues in its ability to connect with consumers and maintain market share globally.

Margin Pressure

Falling Gross Margins: Nike's gross margin decreased by 330 basis points, which was a key concern. The company cited higher inventory obsolescence, increased discounting, and rising product costs as contributors to this margin compression. If this trend continues, it could further impact profitability.

Higher Product Costs: Increased costs for manufacturing and logistics, coupled with the need to offer discounts to move inventory, put further pressure on Nike's margins, reducing its ability to maintain healthy profit levels.

Increased Advertising and Marketing Costs

Ineffective Marketing Spend: Nike has been spending heavily on advertising and promotional campaigns in an attempt to drive sales. However, despite an 8% increase in marketing expenses, the company has still seen a decline in sales. This disconnect suggests that the brand’s traditional marketing approach may no longer resonate with consumers, which is concerning for a company whose brand equity has been a significant strength.

Competitive Pressure

Intensified Competition: Nike faces fierce competition from other major athletic brands like Adidas, Under Armour, and newer entrants in the market. Additionally, emerging direct-to-consumer brands that bypass traditional retail channels are growing in popularity. This competition is forcing Nike to rethink its pricing, marketing, and distribution strategies to maintain its market leadership.

Price Sensitivity: With consumers becoming more price-sensitive, Nike may be forced to offer deeper discounts, which can further erode margins and damage brand perception over time.

Supply Chain and Inventory Issues

Inventory Glut: Nike has faced challenges with excess inventory, as evidenced by its increased discounts and markdowns. This situation could worsen if demand continues to lag behind expectations, leading to more inventory issues and potentially further financial write-downs.

Supply Chain Disruptions: Global supply chain issues, including production delays, rising shipping costs, and logistical challenges, continue to impact Nike and other retailers. While Nike has a strong supply chain, persistent disruptions could further strain the company’s ability to meet demand and maintain profitability.

Valuation

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.

Market sentiment

Nike’s market sentiment has been largely negative following its recent financial results. The company reported disappointing earnings, with significant declines in revenue and gross margins, along with a drop in sales across all major regions. This underperformance has led to a lack of confidence from investors, reflected in a more than 6% drop in its stock price in after-hours trading after the earnings announcement. Despite efforts to focus on direct-to-consumer sales, the strategy has not paid off as expected, opening doors for competitors and leaving Nike with excess inventory and lower margins.

The company's struggles in a competitive market, compounded by rising advertising and promotional spending without corresponding sales growth, have created doubts about its near-term prospects. This has contributed to a negative sentiment in the market, with many investors hesitant to buy the stock at current prices.

However, despite the current challenges, Nike's strong brand equity and potential for recovery in the long term keep some investors hopeful. But for now, the sentiment seems to lean more toward caution, with many market observers viewing it as a "hold" or "avoid" stock until further improvements are seen. Investors are waiting for signs of recovery in the coming quarters before making any substantial moves.

Conclusion

Nike is a brand I admire and would love to own, and I believe it can recover over time. However, I see more downside in the short term, and I wouldn’t buy at current levels. I would look for a price in the $50–$55 range before considering it a strong buy. As of now, my recommendation is to hold if you own it, but I wouldn’t buy at this price unless there's a major improvement, which is unlikely to come until the next quarterly report in three months.

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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