Nike Stock: Is the Worst Over?

Investors hoping for a turnaround at Nike (NYSE: NKE) will have to wait longer.

The world's leading sportswear company posted yet another quarter of declining revenue and profits and told investors that things would get worse in the fiscal fourth quarter, the current period.

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The quarter marked Nike's fourth straight period of declining revenue as sales fell 9% to $11.3 billion, dragging earnings per share down to $0.54, well below the $0.98 it reported after adjustments in the quarter a year ago.

While the results were ahead of analyst estimates, investors were unimpressed by the quarter. The stock hit a five-year low and was down 5% in Friday afternoon trading. Excluding the pandemic crash, the stock was trading at its lowest point since 2018, underscoring the crisis the business now finds itself in.

Nike brought longtime company veteran Elliott Hill out of retirement to replace John Donahoe as CEO after Donahoe's focus on performance marketing, direct-to-consumer sales, and classic styles seemed to lead the business astray. Hill's turnaround strategy, which is focused on reestablishing relationships with retailers, putting sports back at the center brand, and returning to a pull marketing strategy sounds like the right prescription, but the numbers continue to disappoint.

While Nike did beat analyst estimates, its Q4 guidance indicated that performance would get even worse. The company sees revenue falling in the mid-teens, which includes the effect of unfavorable shipment timing, and it expects gross margin to fall 400 to 500 basis points, which includes the effect from new tariffs.

There was a silver lining, however. Management expects the headwinds from the Win Now turnaround strategy, which is focused in part on streamlining inventory, to moderate after Q4, indicating that the financial recovery should begin in earnest in fiscal 2026.

Image source: Nike.

It wasn't all bad

Nike's revenue declined in nearly every category, but there were some bright spots that investors shouldn't ignore.

Its running business grew by mid-single digits, driven by new products like Pegasus Premium and Vomero 18, as well as the continued success of Pegasus 41. The recovery in running is key, as that's an area where Nike has struggled, losing share to upstart brands like On Holding and Deckers' HOKA.

It also returned to revenue growth in Japan and Latin America, though overall revenue in the Asia-Pacific Latin America (APLA) segment, which does not include China, was down 4% on a currency-neutral basis.

Finally, its performance footwear and apparel business delivered growth, which was offset by declines in sportswear and the Jordan brand. However, the strength in performance gear is also promising, as it shows that new product launches are resonating. The performance category is where the company needs to shine in order to win athletes and influencers and create a broader halo effect for the brand.

Nike is still working to overhaul its inventory and get back to a full-price business model, though that process seems likely to take at least a few more quarters.

The key question for investors

Nike's guidance was ugly, and there are real questions about the brand's ability to regain the business it's lost. Fashion trends are always changing, and competitors like On and HOKA are gaining market share quickly.

The company hasn't given guidance for fiscal 2026, but Nike seems like it will be in a good place to rebuild margins after this year's reset. With the exception of the quarter when the pandemic started, Nike just reported its worst gross margin in a decade at 41.3%, and Q4 is set to be even worse.

In other words, this may be the "kitchen sink" earnings report that signals that the company's performance is finally bottoming out as it dumps all the bad news on investors to reset expectations. While the macro environment is fluid, Hill does seem to have the business pointed in the right direction.

Investors don't like being told to be patient, and they'd like to see improving results now rather than later. It's understandable for the stock to be hovering around seven-year lows after several quarters of declining revenue.

However, the sell-off also presents an opportunity. With the margin reset, inventory clearance, and focus on reestablishing retail relationships and a full-price business model, Nike seems likely to be in a better position in a year from now. Hill has been at the helm for just six months, and the changes he's made will take some time to play out. Patience could pay off for investors here.

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Jeremy Bowman has positions in Nike. The Motley Fool has positions in and recommends Deckers Outdoor and Nike. The Motley Fool recommends On Holding. The Motley Fool has a disclosure policy.