Nike’s Growth Problem is Bigger than One Bad Quarter

NIKE, Inc. (NYSE:NKE) is in a tough spot. The company is trying to get growth back on track under CEO Elliott Hill, who took over in late 2024, but the latest numbers show that turning things around is going to take time. Nike’s fiscal 2027 first-quarter revenue fell 4% from a year earlier to $11.2 billion, missing Wall Street’s $11.3 billion estimate. Diluted EPS came in at $0.48, down from $0.49 a year earlier, although it was still better than the $0.44 analysts were expecting.

The bigger issue was the outlook. Nike now expects fiscal 2027 revenue to fall by a high-single-digit percentage. That was a much weaker forecast than analysts had been looking for, and the stock fell sharply after the announcement.

What’s wrong with Nike?

This isn’t just about one bad quarter. NIKE, Inc. brought in $51.4 billion in revenue in fiscal 2024. A year later, that number had fallen to $46.3 billion. In fiscal 2026, revenue was basically flat at $46.4 billion. At the same time, operating income dropped from $6.3 billion in fiscal 2024 to just $3.7 billion in fiscal 2026.

So, Nike has a two-sided problem. Sales have stalled, and the business is making less money from those sales. A big part of the problem is that Nike hasn’t been producing enough products that get people excited. Analysts cited by Reuters have pointed to the lack of new, compelling products, which has also pushed Nike toward heavier discounting. The company is cutting back on Jordan retro launches as well. Also, Nike no longer has the athletic footwear market to itself. Brands such as On have been gaining traction, particularly with younger consumers and in some of the categories where Nike once had a much stronger position.

China is another sore spot. Nike’s Greater China revenue fell 26% on a currency-neutral basis in the latest quarter. That was the ninth consecutive quarter of declining sales in the region. China accounts for around 15% of Nike’s annual revenue, so this is hardly a small problem. Nike is trying to clean things up by changing its distribution strategy. The company plans to take online sales rights away from some major Chinese retail partners, among other changes. But management has already warned that the cleanup could take several seasons. In other words, don’t expect China to turn around overnight.

The turnaround is showing some progress

There are still a few positives worth keeping in mind. North American sales rose 2% on a currency-neutral basis, helped by the performance business and the World Cup. Nike also managed to lift gross margin by 60 basis points to 42.8%. Selling and administrative expenses fell 3%, while inventory declined 3% to $7.8 billion.

The company is also taking a more aggressive approach to cutting costs. Nike recently launched its Pace restructuring program, which is designed to simplify its geographic structure, streamline the organization, and modernize its supply chain. Management expects the program to generate around $2.5 billion in savings through fiscal 2031, although most of those savings are expected to come in fiscal 2029 and 2030.

That should help the bottom line. However, there is a limit to what cost-cutting can do. Nike can reduce expenses all it wants, but eventually it needs to sell more shoes and apparel at healthy prices. That means getting the product side of the business right again.

Is Nike stock cheap?

NIKE, Inc. is certainly cheaper than it was a few years ago. But cheaper doesn’t automatically mean cheap. The stock currently trades at about 17x trailing earnings and 21x forward earnings. Investors also get an annual dividend of around $1.64 per share, which gives Nike a dividend yield of roughly 4.6%. At first glance, that yield is pretty attractive. But the forward P/E needs to be looked at in context.

At 21x forward earnings, Nike’s earnings yield is roughly 4.8%. That’s not a huge premium to what investors can get from safer assets. Long-term Treasury yields are above 5%, and Reuters reported that the 10-year Treasury yield was above 5.3% at the start of October. Nike investors are being asked to wait for a turnaround while they can earn a similar yield from government bonds without taking on the same business risk.

The dividend certainly helps. A yield of around 4.6% gives shareholders some cash while they wait for Nike to get back on its feet. However, even the dividend isn’t completely bulletproof. Nike’s payout ratio has climbed to around 78%, which means the company is now paying out a large chunk of its earnings to shareholders. If profits remain weak, there isn’t as much room for the dividend to keep growing at the pace investors may have become accustomed to.

That makes earnings recovery the real key to the valuation. If Nike manages to rebuild its brand momentum, improve sales, and get profits growing again, a 21x forward P/E may turn out to be reasonable. However, if China remains weak, competitors continue taking market share, and Nike struggles to come up with products that resonate with consumers, the stock may not be turn out to be the bargain that it seems.

For now, Nike is better viewed as a turnaround play that happens to come with a sizeable dividend. The dividend gives investors something to hold onto while management works through the mess. But ultimately, Nike needs to get people excited about its products again. That’s what will determine whether this turnaround really works.

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This article is originally published at Insider Monkey.