Nike (NKE 1.11%) shares plunged after its fiscal third-quarter results showed the company continuing to struggle to turn around its business. The results were similar to what it has experienced much of the past fiscal year, with flattish revenue and a declining gross margin. Meanwhile, Nike expected the rest of its fiscal year to remain challenging, hurt by China and its Converse business.
After its sell-off last week, the apparel stock is now down about 30% on the year, as of this writing.
NYSE: NKE
Key Data Points
A slow turnaround
Nike admitted on its earnings conference call for the period ended Feb. 28 that its turnaround was taking longer than expected, but management thinks its strategy will help set the company up for long-term success. It said one of the most important things it accomplished in the quarter was reducing inventory in its classic footwear franchises. Former CEO John Donahoe eschewed innovation and leaned into its classic footwear brands, which oversaturated the market, so current CEO Elliot Hill has been working to correct this mistake.
In areas where Nike did innovate, it saw solid success. Its neuroscience-based Nike Mind footwear platform resonated with customers, with Mind 001 selling out across regions. The company will double production of the platform over the next two seasons, as more than 2 million consumers have signed up to be notified when the shoes are available.
Hill and company also continue to undo Donahoe's direct-to-consumer (DTC)-centric approach by reestablishing relationships with wholesale partners. Meanwhile, it is trying to turn its DTC operations more into the place to get its premium product offerings.
That said, the company remains very much in a transitional state. Overall revenue was flat at $11.3 billion. Nike brand revenue rose 1% to $11 billion, while Converse revenue plunged 35% to $264 million. Wholesale revenue increased 5%, while Nike Direct revenue fell 4%. Its overall revenue was boosted by currency impacts.
Nike's North American revenue rose by 3%, but the company struggled in international markets. EMEA (Europe, Middle East, and Africa) revenue dropped 7%, while China revenue declined by 10%, and Asia Pacific and Latin America revenue fell by 2%. Management projected revenue from Greater China would be very weak in fiscal Q4, guiding for a 20% plunge.
Meanwhile, the company continued to feel the brunt of tariffs, with its gross margin falling 130 basis points to 40.2%. It expects gross margin to "inflect" in fiscal Q2 2027, setting the stage for an earnings recovery. It expects its "Win Now" restructuring plan to be complete by the end of 2026.
Image source: The Motley Fool.
Can the stock recover?
The best thing to be said about Nike is that its current CEO appears to be willing to incur short-term pain to help reset the business and try to dig the company out of the hole its prior CEO created. It's a work in progress, but his actions could position the company for meaningful operating margin recovery in the coming years. However, investors are likely going to need to remain patient.
As such, there is no rush to buy the stock right now.
