Nike-Owned Converse May Be About to Make Deep Cuts. Will It Affect Nike's Stock?

Since Elliott Hill took over as CEO more than a year ago, Nike (NYSE: NKE) has been in the midst of a far-reaching turnaround, attempting to reestablish relationships with key retail partners, bring sport back to the center of the brand, and start innovating again.

While that turnaround strategy has delivered some successes, an ongoing pain point for Nike has been Converse, the sneaker brand it acquired in 2003, which is probably best known for the timeless Chuck Taylor line.

In Nike's most recent quarter, revenue from Converse fell 30% to $300 million, including declines in all of its regions, continuing a long run of negative growth at the sub-brand.

Image source: Nike.

Layoffs could be coming

After several quarters of declining revenue at Converse and sales at a 15-year low, layoffs now seem to be on the docket for the footwear brand, according to reporting in several media outlets.

Converse CEO Aaron Cain said that the company had to make difficult decisions, in an internal memo reported by Bloomberg, including "saying goodbye to friends and teammates," and senior executives are expected to be leaving as well.

It's unclear how many jobs are being cut in the move, but it follows a round of layoffs at Nike as the sportswear giant tries to regain its footing and return to profit.

What it means for Nike stock

The human toll of layoffs generally makes them one of the last options for struggling businesses, but investors have mixed responses to them. Sometimes, a stock goes up on news of layoffs as investors believe it will lead to lower costs and, therefore, increased profits.

Nike stock slipped 2.4% on Monday, but it was unclear if that was related to the Converse news. Converse represents just 2.5% of Nike's revenue, so it's a marginal part of its business at this point, and there's a bigger question facing Nike over whether Converse will remain inside its portfolio.

Nike has sold off three other brands it previously owned, Cole Haan, Hurley, and Umbro, and analysts have speculated that Converse could go on the auction block.

Management has not addressed that prospect or suggested it on its earnings calls, though Hill said recently "We're resetting the marketplace for Converse under new leadership," which implies some major changes at the brand.

Overall, whatever Nike can do to return Converse to growth is the best thing for the stock. Layoffs may be a part of the process, or the company may decide to sell it eventually.

Nike has forecast continued challenges at Converse through this fiscal year, so investors should be patient with the Converse turnaround.

Jeremy Bowman has positions in Nike. The Motley Fool has positions in and recommends Nike. The Motley Fool has a disclosure policy.