Did Nike's Turnaround Just Begin?

Nike (NYSE: NKE) stock jumped 16% on Friday following its fiscal fourth-quarter earnings report the night before. That move would be the biggest one-day percentage gain for the stock in several years.

Nike has been in a downward spiral since its peak in 2021 as a strategic shift toward the direct-to-consumer channel under former CEO John Donahoe flopped. However, after offering guidance for the first quarter of the new fiscal year that topped expectations, management seemed to give investors a ray of hope for the first time in years.

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As expected, fourth-quarter results were ugly, but they still topped expectations. Revenue fell 12% to $11.1 billion, but that was ahead of $10.72 billion, and gross margin contracted by 440 basis points to 40.3% due to increased discounts to clear inventory and a shift to the wholesale channel. On the bottom line, the company reported earnings per share of just $0.14, down from $0.99 in the quarter a year ago, but that was slightly ahead of expectations of $0.12.

The stock was initially flat in response to the results, but then soared when the company gave its guidance for the first quarter. The company expects revenue to be down mid-single digits and sees margins compressing again, calling for gross margins to be down 350 to 425 basis points, including 100 basis points of tariff-related headwinds.

It also sees selling, general, and administrative expenses up low single digits. Altogether, the forecast calls for profits to fall sharply again, though the guidance was still better than expected. Management also said it expected tariffs to add $1 billion to its costs for the year.

Image source: Getty Images.

Is the momentum shifting?

Nike's results and guidance were by no means good, but the company said that headwinds in revenue and margins would moderate after the fourth quarter, and it came through on that forecast.

Additionally, CEO Elliott Hill continued to tout the operational turnaround in the business as he's refreshed his management team, flattened the leadership structure, realigning the company's management teams. Nike has rightsized classic sneaker brands like Air Force 1, Dunk, and Air Jordan 1, and It's seeing momentum in key businesses like running, which grew high-single digits in the quarter. Its launch of Las Vegas Aces star A'ja Wilson's first signature shoe sold out in three minutes on Nike Digital in North America.

It's also improving wholesale relationships with key partners like Dick's Sporting Goods and JD Sports in Europe, where it's seeing increased sell-through around its products like its training collection and Air Max 95. Finally, events like the After Dark run series in Los Angeles have helped re-ignite excitement around the brand in local markets and boost sales.

Is Nike a buy?

In addition to the surge in the stock, Nike received a chorus of positive analyst notes and price target increases, and HSBC upgraded the stock to buy.

It's clear that Wall Street believes a turnaround is under way, and it's easy to see why. Much of Nike's challenges under Donahoe were self-inflicted, including neglecting wholesale partners, shifting too much to performance marketing over brand marketing, and relying on classic brands while it overlooked innovation.

Even after Friday's jump, the stock is still down nearly 60% from its all-time high. However, Nike is still likely years away from returning to its previous heights given that it barely reported a profit in the fourth quarter and the first quarter is likely to be the same. with revenue still declining as well.

In other words, Nike does look like a buy, but investors will have to be patient. There are some potentially positive catalysts for the company coming, including the expected launch of Caitlin Clark's signature shoe, which is in the works, and Nike's new product ready for next year's World Cup in North America.

With earnings impaired, Nike's valuation will look ugly for at least the next year, but its business should be able to get back to its previous heights and the stock should as well with enough time.

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HSBC Holdings is an advertising partner of Motley Fool Money. Jeremy Bowman has positions in Nike. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends HSBC Holdings. The Motley Fool has a disclosure policy.