In the sports world, fans dread hearing about "rebuilding." Similarly, in the stock market, when a company executive mentions a "transition year," shareholders often feel uneasy. This scenario is unfolding for NIKE (NKE, Financial), which missed Q4 revenue expectations and lowered its FY25 revenue outlook. CEO John Donahoe has labeled FY25 as a transition year for the company.
- Despite some cost-cutting efforts, including 750 layoffs in April at its Beaverton, Oregon headquarters, and $1.0 billion in share buybacks in Q4, NKE managed to top EPS estimates for the fourth consecutive quarter. However, this EPS streak is overshadowed by ongoing top-line struggles, with sales dipping by 1.6%. This decline raises concerns that competitors like adidas (ADDYY, Financial), On (ONON, Financial), Puma, and Deckers' (DECK, Financial) HOKA are eroding NKE's market share.
- Once an underdog before Michael Jordan boosted its popularity, it's alarming to see NKE's smaller competitors gaining ground due to self-inflicted issues. CEO Donahoe has admitted the company is not meeting its standards, with a lack of innovation at the core of its struggles.
- In recent years, NKE has relied on its best-selling products, such as the Air Force 1 shoe, while reducing new product development and advertising. Given the significant supply chain disruptions during and after the pandemic, a conservative approach was understandable. However, it is now clear that NKE has been too slow to reignite its innovation engine.
- This is evident from the 8% sales decline in NKE's direct-to-consumer business and the 1% drop in overall sales in the key North America market. A leaner inventory at NKE's retail partners helped push gross margin higher by 110 basis points to 44.7%, but even this metric fell short of expectations.
- The main issue weighing on the stock is the downwardly revised FY25 revenue guidance. Initially, NKE had guided for positive growth in FY25, but now it forecasts a mid-single-digit decline, with a 10% drop expected in Q1. Essentially, NKE's weak outlook indicates that its product innovation initiatives won't yield significant results this calendar year, disappointing many investors.
The one positive note is that CFO Matthew Friend expects meaningful, sequential improvement in 2H25 compared to 1H25, driven by the launch of new products. However, this optimism offers little comfort to NKE shareholders, many of whom are hesitant to wait for the transition year to unfold.
