Several analysts expect Nike will lower guidance for the second straight quarter when it reports first-quarter results after the market’s close on Tuesday due in part to weakness in China but also to lower the bar for incoming CEO, Elliott Hill.
Nike announced on September 20 that CEO and President John Donahue will retire and be replaced by 32-year Nike veteran Hill, effective October 14. Hill retired from Nike in 2020 while he was president of the company’s consumer and marketplace division.
Donahue’s exit comes as Nike has lost market share to long-time competitors such as New Balance and Adidas as well as upstarts, especially Hoka and On, due in part to a move to reduce exposure to wholesale channels and emphasize direct-to-consumer (DTC) selling. Donahue, who previously held leadership roles at ServiceNow, eBay and Bain & Co, was also seen as lacking enough footwear experience to adequately drive Nike’s innovation efforts.
Citi Research’s analyst Paul Lejuez expects that when Nike reported Tuesday evening, it will reduce its implied FY25 guidance from $3.00 to $3.10 a share to approximately $2.80, below analyst’s consensus of $3.10, as expectations are reset with the management change.
“Although Hill doesn’t start until mid-Oct, new leadership is likely to follow the Adidas 2023 playbook, using the transition as an opportunity to re-base F25 EPS lower, setting up for future beats,” said Lejuez.
Lejuez said the reduced guidance will likely be attributed to weakening China macro conditions and required brand reset in that region, as well as more conservative assumptions tied to the planned innovation-driven sales acceleration in the second half of Nike’s FY25 year. Said Lejuez., “Whether another guide down matters is tough to say, but we believe investors are likely to give NKE a pass on near-term weakness with more focus on how a brand turnaround could impact NKE’s F26 and improve confidence in long-term earnings potential.”
Lejuez, who has a “buy” rating on Nike at $102 price target, still expects Nike to deliver first-quarter EPS above analyst targets due to lower expenses.
Shares of Nike closed at $88.40, down $1.03, Monday. Shares have traded as high as $123.39 and as low as $70.75 over the last 52 weeks.
In June, Nike surprised Wall Street by predicting sales to fall by mid-single digits in its fiscal year that ends May 31, 2025, including a high-single-digit drop in the first half. Previously, Nike had predicted sales would grow for the full year.
Analysts revised their expectations since and on average expect Nike to report a 5 percent drop in FY25 annual revenue.
For the first quarter ended August 31, in line with Nike’s guidance, revenue is expected to decline 10 percent to $11.65 billion, its steepest drop in more than four years. EPS is expected to slump 44.7 percent to 52 cents. Nike warned that the quarter would be impacted by weakness in its key classic franchises: Air Force 1, Dunk, and Air Jordan; continued online sales declines; wholesale softness due in part to its moves to reduce or cut ties with long-time wholesale partners, Greater China challenges; and timing shifts.
Morgan Stanley analyst Alex Straton likewise suspects a fiscal year guidance reduction is likely when Nike reports first-quarter results and also wonders if Nike will cancel its investor day scheduled for November 19 so that Hill has adequate time to assess the business, revise strategy and address the market at a later date.
Straton, who has an “Equal Weight” rating on Nike at a $79 price target, still believes the CEO change as a change at the top to be a “positive announcement,” but labels it “unsurprising in light of recent P&L volatility, guidance shortcomings, and a lack of strategic clarity.”
Baird’s Jonathan Komp said Nike should exceed conservative estimates for the first quarter but he believes Nike may downwardly revise expectations for the second half “to provide cushion for incoming CEO Elliott Hill to focus on improving quality of sales/profitability in a challenging macroeconomic environment.”
Addressing regional performances, Komp said he’s comfortable with the Wall Street’s expectations calling for a 7.2 percent decline in sales in the first quarter in Greater China although the profit warning by TopSports has raised investor concerns on the second half. In EMEA, Nike “likely is facing competitive challenges,” including Adidas regaining momentum. He believes North America, which is expected to show a decline of 11.2 percent in the first quarter according to consensus estimates, will take time to recover given “the need to scale a range of retro running styles and new air-focused innovation (likely in calendar-2025), while also re-engaging wholesale partners.”
Komp still has an “Outperform” rating on Nike at an $88 price target. He believes investors will focus on Nike’s new CEO’s ability to deliver more than $3 a share in EPS for FY26. Komp wrote in a note, “While we acknowledge low visibility to the near-term financial outlook, we are optimistic new leadership can engineer a multi-year recovery with potential to return to [greater than] mid-single-digit annual revenue growth and mid-teens EBIT margin.”
Telsey Advisory Group’s Cristina Fernández said she expects Nike to “at least” meet expectations for the first quarter and maintain its full fiscal year outlook while spending much of the call detailing progress made on bringing newness to the marketplace. She suspects that given that Hill starts on October 14, Mark Parker, current executive chairman and former CEO, might participate on the analyst call.
“We see some risk that Nike’s near-term results are weaker, as Nike’s DTC channel has remained promotional, and a new CEO might decide that more aggressive steps are needed to return to growth,” said Fernández.
While she believes the full turnaround story will be detailed on the upcoming investor day, key topics investors will be focused on with the analyst call include the pace and quality of product innovation, the management of key lifestyle franchises, repairing relationships with wholesale partners, inventory levels, the regional outlook, and the operating margin potential over the next few years.
Fernández continues to have an “outperform” rating on Nike at a $100 price target.
She wrote, “Overall, Nike is in a period of transition and a return to growth could take a few quarters. Despite some near-term concerns, we see reasons to stay positive on the stock and Nike’s turnaround: 1) the CEO transition has the potential to re-energize Nike’s employee base and product innovation engine; 2) product introductions are increasing over the next few years, with positive initial responses to launches like Pegasus 41; 3) partners like Dick’s Sporting Goods and Foot Locker have expressed excitement around Nike’s product pipeline; and 4) Nike is seeing strength in performance, led by basketball and football, and the company has a rich product archive it can tap for lifestyle products.”
Williams Trading’s Sam Poser on September 25 downwardly adjusted his EPS and revenue estimates on Nike due to a potential FY25 guidance reduction. He believes that Nike’s business has not improved since fourth-quarter earnings arrived and may have “worsened, primarily due to a weakening Chinese consumer, and ongoing lack of product innovation.”
However, Poser still has a “Buy” rating on Nike at a $93 price target, believing the incoming CEO continues to be a “positive catalyst” for Nike’s stock. Poser wrote, “Today, the outlook for Nike is far better than it was at this time last week. Nike’s employees are far more motivated than they were at this time last week. Across divisions at Nike, our checks indicate that its employees were in a celebratory mood following the announcement that Elliot Hill was returning to the company as CEO. Motivated employees will drive positive change much more efficiently and much faster than unmotivated employees.”
Bank of America’s Lorraine Hutchinson also believes the announcement that Hill is taking over as CEO likely pushes out the timing of the investor day event and the anticipated arrival of an updated longer-range plan. However, she expects Nike to reiterate its full year guidance.
Hutchinson, who continues to have a “Buy” rating at a $ 104 price target, believes first-quarter results “should mark the trough for sales growth and peak SG&A deleverage, with lifestyle DTC exits and weakening international conditions taking hold without sufficient newness to replace the sales volume.” She also noted that investments in the Olympics weighed on expense leverage in the latest quarter.
For Nike’s fiscal second half, Bank of America expects flat growth based on confidence around new products, plans to scale innovation and early order book indications. Hutchinson said sign of a sales recovery heard on Tuesdays’ analyst call will be critical in driving the stock. The analyst wrote, “In the near term, a narrative of gradual improvement with milestones along the way would allay concerns of another earnings cut and should pave a path to better stock performance.”
In a note following Hill’s hiring, Stifel’s Jim Duffy said he was “encouraged to see a long-time NIKE insider” return to the CEO role to help revitalize the company’s culture and revive innovation.
He still kept his “Hold” rating at a price target of $79 as he sees the CEO change possibly leading to another reduction in sales targets, additional executive changes and a “prolonged period of product revitalization.”
Duffy wrote, “Simplistically, we believe NIKE’s recent underperformance is a direct result of losing focus on what has made the company great for so many years – innovating, designing cool products, and telling great stories to create demand for these products in the marketplace. Under Mr. Hill’s leadership, we hope to see a revitalization of the NIKE culture (the good parts) and a renaissance in innovation and design. This said, given the scale of the business, the go-forward economic model is likely to have lower returns than the precedent model, which supported the historical multiple premium. The Investor Day planned for late November will likely outline a new multi-year growth algorithm.:”
Image courtesy Nike
