The Toughest Questions Nike Faced On Its Latest Call
Nike’s turnaround is a tale of two businesses, and on its latest call, analysts focused on why the successful half isn’t saving the struggling half.
Nike (NKE) stock has been punished, trading near 52-week lows after a 40% drop over the past year. On its latest earnings call, analysts kept circling one central, awkward question: If the company’s vaunted “sport offense” is working so well in performance categories, why is it failing to revive the large Sportswear and Jordan streetwear segments that make up half the business?
The Sportswear Answer Kicked The Can
The halo effect from a resurgent running business to the struggling lifestyle categories is the core of the bull case, and it appears to be missing in action. Management admits that sell-through in Nike Sportswear and Jordan remains “challenged,” a critical problem when those segments represent “approximately half of our revenue.” This weakness is impacting both current discounts and future orders, a worry one analyst put squarely to management.
The response was more about process than immediate results. The CEO detailed the success in running, which has added roughly “$1 billion” to the business over five consecutive quarters of double-digit growth. But for the struggling half of the company, the fix is in the future. The plan is for Sportswear to introduce “more than a dozen new footwear styles” in the second half of the fiscal year. That’s a tangible plan, but it leaves the core problem unsolved for at least two more quarters.
The New Math Has A Number In It
The other side of the story is the new financial math. With management acknowledging that the “consumer is under pressure” and that retail sales trends decelerated starting in mid-April, the revenue outlook was cut. The company now expects revenue to be “down low to mid single digits” for the coming period. The sharp question was how margins could possibly improve if sales are falling.
The CFO’s reply was direct and numbers-backed. Gross margin expansion is now expected to begin in Q1, pulled forward from previous guidance. The drivers are internal and don’t depend on a sales recovery: structural improvements to the supply chain and better discounting. In North America, for instance, lower sales-related reserves and cancellations are already providing a lift, a sign of a “healthier business” emerging with key partners. This was a convincing answer that separates operational control from an uncertain demand environment.
What To Watch Now
Management effectively confirmed that the turnaround is a two-speed story. The performance business is executing, but the much larger lifestyle business is not, and a fix is still months away. The company bets that it can manage costs and improve profitability even as the top line shrinks, creating a stronger foundation for when growth eventually returns. The question of what the real risk is for investors from here is something we explored in a separate piece.
The one thing to watch is the reception of those new Sportswear styles next year. Their success or failure at full price will tell you if the real engine of Nike’s business has finally been restarted. For investors who like the consumer discretionary theme but are wary of the single-stock risk in this turnaround, a consumer discretionary ETF like XLY offers broader exposure.
Reading The Q&A Is Step One, Not The Whole Job
Knowing what analysts pressed a company on is a real edge, and it is also a reminder of how much rides on questions management has not fully answered. Swapping the stock for a sector fund only trades single-company risk for single-theme risk; the group still rises and falls together.
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