Nike’s Turnaround Hits a Speed Bump on Disappointing Fiscal 2027 Guidance. Should Investors Run for the Exits?

Investors clearly weren't eager to walk or, more accurately, run a mile in Nike's (NYSE:NKE) shoes after the company reported fresh quarterly earnings after market close on Thursday. The company beat on earnings in its first quarter of fiscal 2027 but whiffed on revenue, and proffered weak guidance to boot.

Clearly underwhelmed by this performance, investors aggressively sold the athletic footwear and apparel giant's stock in after-hours trading that day. Late Thursday evening, it was down by almost 9%. Let's dig in to see what they found so displeasing.

Image source: Getty Images.

A tired athlete

Right off the bat, they surely weren't happy about Nike's top-line decline. Revenue for the period slid by 4% year over year to $11.21 billion. Net income under generally accepted accounting principles (GAAP) also fell, but more modestly, by 2% to $712 million, or $0.48 per share.

On average, analysts tracking the company's stock were modeling $11.35 billion for revenue and $0.44 per share for GAAP net profit.

No one likes a revenue decline, and there were several concerning aspects about this one. One is that this was a trend outside the company's native North America; in Europe, the Middle East, and Africa (EMEA), the top line eroded by 5%, while the dip in Asia Pacific and Latin America was 2%. Far worse was the 22% cratering in the massive market of Greater China (i.e., mainland China plus the country's "special administrative regions" of Hong Kong and Macao, and Taiwan). An uninspiring 2% bump in North American sales wasn’t enough to offset these declines.

We can say the same for categories, as two of the three — footwear and equipment -- also saw year-over-year falls (by 6% and 3%, respectively). Unfortunately, footwear is far and away the most important in terms of revenue, bringing in $6.95 billion in the quarter; equipment, by contrast, contributed $611 million. Apparel managed to post modest growth, at 2%, with sales of $3.38 billion.

Slow change

Nike is now well into a turnaround effort led by CEO and longtime company veteran Elliott Hill. His predecessor, John Donahoe, helmed an ambitious but flawed attempt to make the company a direct-to-consumer (DTC) powerhouse through its Nike Direct platform, abandoning many of its strong relationships with retailers such as Foot Locker. Hill has flipped that approach to favor retailers once again, and his team has spent much time and effort rebuilding those ties.

As most of us know, however, it's harder to build than to demolish. Meanwhile, there are plenty of hungry competitors around the world eager to grab market share from Nike. So the about-face has been slow and halting; meanwhile, DTC -- whose revenue slumped by 8% to $4.1 billion -- is performing like the unfavored sales channel it is.

Management is obviously not expecting a sudden and happy change of fortune. For the first time, it proffered guidance for the entirety of fiscal 2027, and this wasn't all that encouraging. Revenue is projected to decline at a high-single-digit rate compared to 2026, with net income of $1.15 to $1.35 per share. The latter is adjusted for roughly $0.15 in restructuring expenses related to the Pace business acceleration program announced earlier this year, so we can put the GAAP profitability guidance at $1 to $1.20 per share. That's quite some distance down from the $2.10 it netted in fiscal 2026.

The company is battening down the hatches. In a letter to employees cited by numerous media outlets, Hill said that operational adjustments will result in job cuts.

"I want to acknowledge that news like this creates uncertainty. I don't take that lightly," the CEO wrote.

It's unclear at the moment how extensive these cuts and the operational adjustments behind them will be.

Still quite pricey

Warren Buffett famously advised investors to be "greedy when others are fearful," so might this apply in beaten-down Nike's case? After all, the company still has one of the strongest brands in the world, and plenty of elite athletes wear and use its gear.

That's admittedly impressive, but it wouldn't make me a buyer of the stock. Hill's initiatives have had time to bake, but (close to) two years into his tenure, the changes haven't been dramatic, to put it charitably. And the company's stock looks more poised for a loss than a gain, given its forward P/E of over 21 -- rather high, in my view, for a company struggling to eke out growth. I'd give Nike's shares a miss in the wake of that earnings report.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool has a disclosure policy.