Nike scored its first rating upgrade since news arrived of Elliot Hill’s appointment as CEO. Truist Securities’ Joe Civello believes Nike’s increasingly veteran-driven management team will be able to revive marketing and innovation, including better promoting Caitlin Clark, while further repairing wholesale relationships. Selling direct on Amazon was also cited as a “game-changer” opportunity.
“While we still view a turnaround process as long/uncertain, we’re more optimistic on shares as investor expectations finally seem to accurately reflect this reality,” wrote Civello in a note Thursday. “Further, with a team of company vets back at the helm, we think they’re moving in the right direction.”
Truist raised its rating on Nike to “Buy” from “Hold” and lifted its price target to $97 from $83. Nike’s shares closed Thursday at $82.10, down 35 cents, and are down 24.4 percent since starting the year at $108.57.
Civello believes Nike’s struggles have been due to its push to emphasize DTC (direct-to-consumer) sales that hampered innovation and “drove customer fatigue around key products.” He believes efforts to reengage wholesale partners “so far have been limited” and called the hiring in July of Tom Peddle, a 30-year Nike veteran, as VP of marketplace partners “the first step in showing that they’re serious about these efforts.”
After the market’s close Thursday, Nike announced that Peddle was appointed to his previous role as VP and general manager for the North Americas region. The subsequent hiring of 32-year Nike veteran Hill with extensive marketplace and marketing experience “strengthens our conviction that the company is moving in the right direction.”
Civello also favorably cited the return of Nicole Graham as chief marketing officer, promotion of Tom Clarke to senior advisor to the CEO, and promotion of former chief design officer John Hoke to replace Clarke as chief innovation officer. The analyst wrote, “Given their backgrounds/successful track records in marketing & innovation (the 2 key areas that Nike has lagged in), we think these leadership shifts can help drive a turnaround.”
Nike’s shift back towards wholesale has been marked by its re-entry into DSW and Macy’s but Civello believes other chains would welcome Nike product and Nike’s reputational risks for selling more downstream are minimal. Civello wrote, “While we understand some investors may be cautious about potentially generating less-quality growth in lower-tier shopping venues, we think that (1) the opportunity to reach more customers in physical retail stores where they already like to shop is too important of an opportunity and (2) Nike’s has enough breadth to effectively segment its products between channels to mitigate risks.”
Beyond making better progress in re-engaging retail partners, another near-term opportunity is ramping up marketing investments, according to Civello. He believes Nike missed opportunities to make larger investments around the Paris Olympics with its focus on expense controls. Civello said, “At this point, we think the bull case for NKE revolves so much more heavily around the LT health of the brand (vs. NT results), that investors will be more than willing to sacrifice some margins to get more visibility into growth.”
Benefiting from promoting Caitlin Clark “should be an easy bucket,” added Civello. Signed by Nike in April and “arguably one of the most popular sports figures of the past year,” Clark hasn’t been widely promoted by Nike. Civello said that while long lead times challenge product turnaround, the inability to deliver Clark’s first signature shoe in time for the WNBA season likely reflects “deeper operational issues” at Nike that the new team could resolve. He noted that Lebron James wore his first signature shoe at his opening game in October 2003 after signing with Nike in May of that year.
Civello also believes Nike should revisit selling directly on Amazon, particularly with Amazon’s progress in policing counterfeits on its platform. Nike ran a small pilot that ran from 2017 to 2019. He believes brands such as Adidas and Ugg “benefit from having their own stores on Amazon because it enables them to curate a premium shopping experience” on a platform that Truist estimates accounts for 48 percent of U.S. e-commerce sales.
Civello said Nike’s shares still aren’t “cheap” and the brand’s “recovery looks like a long/bumpy process.” However, he believes the shares’ recent underperformance presents an “attractive entry” point into a longer-term turnaround story.
“We think investor expectations have been appropriately reset to reflect the near/medium-term pressures that Nike is facing,” said Civello. “At these levels we think qualitative improvements that highlight that the new management team is aggressively pursuing a turnaround (potentially by executing on some of the items discussed in this note) would be enough for shares to outperform.”
