Nike Just Reported Earnings. Here's What Investors Need to Know.

Nike (NYSE:NKE) just did it again, and not in a good way.

The world's largest sportswear brand just delivered another underwhelming earnings report with revenue and profits both declining.

The turnaround that was supposed to begin when CEO Elliott Hill took the helm two years ago has not materialized, and Nike's guidance shows it will struggle in the current fiscal year. On Friday, the stock was down 6% in response to the report.

Here are three things investors should know after the first-quarter earnings report.

Image source: The Motley Fool.

1. The numbers are still awful

Nike hasn't had a quarter with better than 1% revenue growth in three years, and that doesn't seem like it will change soon.

Revenue in the first quarter fell 4% to $11.2 billion, missing the analyst consensus at $11.32 billion. Notably, the decline came in the same quarter as the FIFA World Cup, one of the world's biggest sporting events.

Nike did manage to grow its margins in the quarter. Gross margin expanded by 60 basis points to 42.8% due to lower warehousing and logistics costs. It cut operating overhead expenses by 6% to $2.7 billion. As a result, operating income was flat, and earnings per share fell from $0.49 to $0.48, which beat the consensus at $0.43.

Nike's guidance for the full fiscal year was even worse, as the company forecast a revenue decline in the high single digits, implying a decline of around 10% for the rest of the year. The company said that it was due to decisions to cut back on oversupplied product in the Jordan brand, sportswear, and Greater China, but it nonetheless shows the business is in disarray two years into its turnaround efforts. Those supply reductions are expected to impact the business into 2028.

Management said operating income would decline by more than revenue, and it forecast adjusted earnings per share of just $1.15-$1.35, well below expectations of just $1.67.

More than anything else, the EPS guidance seems to explain the sell-off in the stock as Nike isn't even cheap based on that updated guidance, even after the stock fell more than 80% from its peak five years ago.

2. The next phase of the turnaround is Pace

Nike spent a lot of time on the earnings call talking about Pace, its plans to scale its Sport Offense strategy, which includes revamping its supply chain, reorganizing the business into three regions: the Americas, Asia-Pacific, and Europe, Middle East, and Africa (EMEA), and cutting jobs to streamline decision-making.

Management said it would provide more details on the strategy at its Investor Day in November.

It also pointed to individual successes within the business, such as growth in the Nike Brand performance portfolio, but those wins aren't sufficient to overcome challenges in areas like sportswear, Jordan, and China.

Nike's commentary doesn't offer any hint about when a recovery might begin, leaving investors to simply hope the latest turnaround efforts pay off.

3. Hill might be on the hot seat

Nike's quarter might be understandable for a brand just starting its turnaround strategy, but this is the start of Hill's third year at the helm, and Nike's results have not improved. Some of these decisions, like scaling back supply in the Jordan brand, could have already happened. Investors can accept a "kitchen-sink" quarter where management dumps all the bad news at once, but they can't tolerate the drip-drip-drip of problems, which creates the perception of mismanagement.

Profits are on track to be the lowest they've been in more than a decade. The collapse in the stock is warranted.

At this point, it's fair to question how long Hill will be around without visible improvement in the results. By comparison, Brian Niccol took over Starbucks around the same time as Hill, and the coffee chain is now back to strong growth after a few quarters of investments paid off.

Nike's peers are struggling as well, but none of them have seen revenue and profits disappear to the extent that the Swoosh has. This is more than just a macro or sector-level problem.

Hill may deserve another two years to return Nike to growth, but if it doesn't happen by then, a change in leadership seems warranted.

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