Nike Just Hit an 11-Year Low. Will Its Turnaround Finally Start on Wednesday?

Nike's (NYSE: NKE) slogan might be "Just Do It," but for investors, it's done nothing good in years.

The stock is hovering near 11-year lows as it prepares to report fourth-quarter earnings on Tuesday after markets close.

It's clear why the footwear giant is struggling. Sales have gone downhill as it's faced a combination of intensifying competition from brands like On Holding and Deckers' Hoka, lackluster consumer spending in North America, weakness in China due to upstart competition and nationalistic consumer sentiment, a failure to sufficiently innovate under former CEO John Donahoe, and a poor strategic decision to pull back from key wholesale partners under Donahoe.

Donahoe was let go nearly two years ago, but new CEO Elliott Hill, who was previously a longtime executive with the company, has been unable to deliver the turnaround investors have hoped for.

Through the first three quarters of the year, Nike's revenue has risen just 1%, and profits have tumbled. Margins have fallen due to tariffs, and the company has cleared out inventory to reset the business. Overall, gross margin has fallen 250 basis points through the first three quarters to 41%, and as a result, earnings per share was down 32% to $1.38.

Nike has reported a decline in profit for seven quarters, since Hill took the helm, and it's set to do so again on Tuesday.

Image source: Getty Images.

What to expect from Nike's Q4

Investors sold the stock after the third-quarter earnings report as management told the company, "Our comeback is taking longer than we would like."

Nike said it would return to gross margin expansion in the second quarter of fiscal 2027, which ends in Nov. 2026, as the impact of tariffs rolls off and the benefits of its "Win Now" turnaround plan take hold.

For the current quarter, management expects revenue to decline 2%-4% with modest growth in North America but declines in Converse and Greater China, where revenue is expected to decline 20% due to reduced wholesale demand and actions it's taking to reset the marketplace, are weighing on growth.

Gross margin was expected to be down just 25-75 basis points, and analysts expect earnings per share to slip from $0.14 to $0.13 in the fourth quarter.

Last week, Nike also announced that CFO Matthew Friend will step down on Aug. 17, to be replaced by David Denton, who was most recently the CFO of Pfizer. CFO transitions are sometimes seen as red flags, especially for companies that are struggling. It's unclear whether Friend was pushed out or whether this is part of Hill filling out his management team, but investors should expect to hear more about the transition on Tuesday.

Is Nike a buy?

Nike's fourth quarter coincided with a spike in energy prices and inflation around much of the world, which raised shipping costs, put a dent in consumer sentiment, and has weighed on discretionary spending, according to reports from large retailers like Walmart.

Peers like Lululemon are also struggling, which seems to reflect increasing competition and consumers being more price-conscious.

Given its forecast of gross margin expansion returning in Q2, a turnaround for Nike does seem to be getting closer, but I'd like to see clearer signs from the company that it's on track before calling the stock a buy.

Despite falling more than 75% from its peak in 2021, Nike is still not cheap as it trades at a price-to-earnings ratio of 27. A better-than-expected round of results or guidance could lead to a surge in the stock, but I think it will take at least a couple more quarters for an inflection point to materialize.

If there's a silver lining, it's that Nike now offers a dividend yield of nearly 4%, but profits have fallen so far that it's now difficult for the company to fund the dividend completely out of earnings.

A cut is unlikely, but investors need to see a path toward profit stabilization and growth to be reassured that the dividend is safe and for the stock to start to recover.

Jeremy Bowman has positions in Lululemon Athletica Inc. and Nike. The Motley Fool has positions in and recommends Deckers Outdoor, Lululemon Athletica Inc., Nike, On Holding, Pfizer, and Walmart. The Motley Fool has a disclosure policy.