Nike Earnings Preview: New CEO Big Plus, Nike’s A China Play But May Require Patience

Summary:

• Nike reports their fiscal Q1 ’25 after the market closes on Tuesday, October 1, ’24. Sell-side consensus is expecting $0.52 in EPS, roughly $878 million in operating income on $11.6 billion in revenue for expected y-o-y declines of -45% in EPS, -45% in operating income and -10% in revenue.
• Full-year fiscal ’25 consensus is currently expecting a decline of 5% in revenue and -23% in EPS. The expected revenue decline for fiscal ’25 is historic, since it’s not preceded by an economic event.
• Nike’s valuation is much more attractive on a relative basis than at any point in the last 10 years, trading at 2.1x trailing-twelve-month revenue.
• Phil Knight and the Nike board have removed the old CEO John Donahoe and brought in Elliott Hill, the former Nike retail channel star, to replace him.

Nike (NYSE:NKE), the footwear and athletic apparel giant, reports their fiscal Q1 ’25 after the market closes on Tuesday, October 1, ’24.

Sell-side consensus is expecting $0.52 in EPS, roughly $878 million in operating income on $11.6 billion in revenue for expected y-o-y declines of -45% in EPS, -45% in operating income and -10% in revenue.

Nike’s expected revenue decline of 10% is the worst rate of y-o-y growth since May 2020’s -38% drop in the heart of the Covid lockdown, and then the negative mid-single digit drops in late 2008 and 2009.

Nike’s full-year fiscal ’25 consensus is currently expecting a decline of 5% in revenue and -23% in EPS. The only years Nike has seen a y-o-y decline in revenue were 1994, 2010, and 2020. That’s a 33-year history.

Traditionally, Nike is a company that generates y-o-y revenue growth (sometimes in the low single digits) like clockwork. To give readers “context”, the expected 5% y-o-y revenue decline for fiscal ’25 is historic, since it’s not preceded by an economic event. This was just a bad management decision. (This blog has modeled the stock since May 1996.)

Hence, Phil Knight and the Nike board removed the old CEO John Donahoe and brought in Elliott Hill, the former Nike retail channel star, to replace him. The huge advantage to Elliott Hill is that unlike many new CEOs, he doesn’t have to “get up to speed” on the business and the personnel, and is intimately familiar with Nike’s internals and channel marketing.

Not to be too critical of Donahoe, but I once saw a picture of John Donahoe sitting in a chair at what must have been a conference or employee gathering, dressed casually, and he looked like a grandfather reading a book to his grandkids spread around the rocking chair. Immediately, I thought of Mark Parker, who, in my opinion, was a natural-born (business) killer who ran Nike for years with energy and conviction and is now over on Disney’s board trying to help Bob Iger straighten Disney out. (My guess is Mark had a considerable hand in getting Donahoe replaced with Hill.)

Valuation

Nike’s stock is still down roughly 50% from its late-2021 highs near $180, when the valuation was much, much richer than it is today.

Late ’21:

• Price-to-sales: 4.9x
• P/E: 48x
• Price-to-cash flow: 41x
• Price-to-free cash flow: 46x
• Dividend yield: 1%

Late ’24:

• Price-to-sales: 2.1x
• PE: 30x
• Price-to-cash flow: 17x
• Price-to-free cash flow:19x
• Dividend yield: 2.40%

Nike’s “Greater China” segment is roughly 15% of the company’s total revenue (it peaked near 22% in late ’21) but 33% of its operating income. Despite the retail channel mishaps in the US, the Chinese economy probably hasn’t helped Nike’s sales in China, and the CCP’s control over sentiment towards American products with the “tariff” tiffs likely hasn’t helped either.

The China bounce this week, with an easier PBOC (People’s Bank of China), is a plus in terms of stimulating the Chinese economy.

Summary / conclusion

Nike, like Apple (AAPL) and Coca-Cola (KO), remains one of the world’s most highly regarded as well as recognized brands, if you follow the consumer surveys that populate the media frequently.

It’s tough to completely lose brand power, but Wells Fargo (WFC) and probably Boeing (BA) are two giants that have lost significant “brand” power. If an airline gave you a choice today of flying from point A to point B and they asked you at the counter when you’re checking in, “You can fly an Airbus or a Boeing”, which would you choose?

Opinions will likely differ – why give consumers a reason to shop other brands?

Nike’s brand or glow or ambience was all about grit and heart and determination and pushing through pain in sports. You think of Nike, you think of winning. You think of “energy”. When you think of Nike, you think of Michael Jordan.

Nike’s abrogation of the retail channel is – in my opinion – probably a lot like like “New Coke’s” scandal of the mid-1980s that turned in a marketing debacle, but to restore shelf space might take longer than just an admission that “We made a mistake” and moving forward with a marketing strategy.

Hopefully, Elliott Hill won’t forget about the importance of innovation, too.

If any one brand is positioned to do it, though, it’s Nike.

Previous Nike articles for readers are here, here, and here.

After the late June ’24, Nike earnings disaster, clients saw some tax loss selling in taxable accounts, but the majority of Nike that was held in client accounts as of March and June ’24 is still being held. Clients have an average cost basis on Nike of between $90 and $100 and some shares were added recently with the appointment of the new CEO.

Nike’s valuation is much more attractive on a relative basis than at any point in the last 10 years. Looking at the historical spreadsheet, the last period Nike could be owned under 2x sales was August of 2011. Nike comes into Tuesday night’s earnings release trading at 2.1x trailing twelve-month revenue.

None of this is advice or a recommendation, but only an opinion. Past performance is no guarantee of future results. Investing can, and does, involve the loss of principal even for short periods of time. Any reference to EPS and revenue consensus estimates is data sourced from LSEG.

Thanks for reading.

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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