Nike, Inc. (NYSE:NKE) is in an awkward position. The company is trying to fix a business that still has tremendous brand power, but its revenue is falling, and some of its biggest franchises have lost momentum. At 21.01x forward earnings, the stock does not look particularly cheap for a company that is still declining.
The company is unlikely to produce a magical turnaround overnight. What investors really need is a better idea of whether CEO Elliott Hill’s strategy can eventually restore growth and profitability. Right now, Nike is asking shareholders to tolerate more pain before they see much of the gain.
In July, we published an article about 14 best blue chip dividend stocks to buy according to hedge funds. Nike ranked sixth on that list. The #1 stock in that list returned more than 18% since the article was published.
Nike’s Performance Business Is Showing Signs of Life
The latest quarter made that clear. Revenue fell 5% on a currency-neutral basis to $11.2 billion. Greater China declined 26%, while Nike Sportswear and Jordan remained major drags. Nike’s performance business, on the other hand, grew at a high-single-digit rate.
That split is probably the most important thing happening inside Nike.
Hill is not trying to fix everything with discounts or a few new sneakers. He is moving Nike back toward sport, where the company historically had a stronger connection with athletes and consumers. Running, football, training, basketball, tennis and golf are all showing growth, and Nike says innovation is driving much of that improvement. Running is particularly interesting, with the company nearly tripling its share of the max-cushioning category over the past year.
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Sportswear and China Remain Major Problems
The problem is that this part of the business is still not large enough to offset what is going wrong elsewhere.
Nike Sportswear, which accounted for just under half of quarterly revenue, fell by low double digits. The company is deliberately reducing supply of the Dunk and other products, while also cutting back the frequency of some Jordan retro releases. The idea is to restore scarcity and reduce the discounting that has made the brands less special.
China is an even bigger challenge. Nike is cleaning up its digital distribution, reducing lower-quality channels and trying to rebuild a more premium presentation. It is also putting more emphasis on locally designed and developed products. The catch is that management expects China to get worse before it gets better, with the reset continuing for multiple seasons.
Why November’s Investor Day Matters
That makes November’s Investor Day more important than the current quarter.
Management plans to provide a longer-term financial framework, including how revenue and profitability could develop over the next five years. It also expects its Pace restructuring program to generate about $2.5 billion of savings, although most of those savings are not expected until fiscal 2029 and 2030.
There is a real risk here. Nike’s problems are not simply an expense problem. Cutting costs can make the company smaller, but it does not automatically make consumers want its products again. Competitors such as Adidas, On, and Hoka have shown that consumers have other choices, particularly in performance running. Nike has to prove that its product pipeline can create sustained demand rather than just a few successful launches.
Then There Is the Matter of Valuation
Then there is the valuation.
Nike, Inc. expects fiscal 2027 adjusted EPS of only $1.15 to $1.35, excluding about $0.15 of restructuring impact. At 21.01x forward earnings, investors are clearly not valuing Nike purely on those depressed numbers. The multiple assumes that earnings recover beyond the current downturn.
That is the interesting part. At this valuation, investors are paying today for a Nike that does not fully exist yet.
Conclusion
Nike has a credible path back, but it is still a path. The performance business is showing that better products can drive growth, while the company is taking painful steps to fix Sportswear, Jordan, and China. At 21.01x forward earnings, Nike is not cheap enough for investors to ignore the problems. The stock needs the turnaround to work and earnings to recover for the valuation to make sense. November’s Investor Day needs to show that today’s pain can actually lead to a healthier Nike.
Market Sentiment
Hedge fund sentiment toward Nike weakened in the second quarter. According to Insider Monkey’s database, 56 hedge funds held Nike in Q2, down from 71 in Q1, while the value of those positions increased slightly from $1.31 billion to $1.35 billion. The decline in the number of hedge funds suggests weaker institutional interest, although the modest increase in the value of their holdings indicates that some existing investors remained committed to the stock.
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This article is originally published at Insider Monkey.
