Following an initial bounce in after-hours trading on Wall Street stoked by better-than-feared second-quarter results (19 December), Nike’s (NKE:NYSE) shares stumbled to trade roughly flat on the realisation the sportswear firm’s turnaround will take longer than expected.

There was also disappointment as the athletic apparel titan, seeking to arrest market share losses amid intensifying competition, forecast a worse-than-expected low double-digit revenue fall for the third quarter including Christmas.

SHORT-TERM PAIN, LONG-TERM GAIN

New chief executive Elliott Hill outlined his strategy to return the sneakers-to-soccer balls behemoth to growth, with Nike now focused on returning sport to the centre of everything it does, though he warned the Oregon-based company’s bid to regain lost market share would entail some short-term pain.

Sales of $12.35 billion for the quarter to 30 November, down 8% year-on-year, and earnings of 78 cents, topped the $12.13 billion and 63 cents anticipated by analysts respectively.

Unfortunately, heavy discounting and Nike’s self-confessed lack of product newness drove sales and profit declines, with sales down in all four of the company’s geographic regions including North America and Greater China.

Gross margins decreased by 100 basis points to 43.6% amid higher discounts and sales channel mix changes, though these were partially offset by lower product input, warehousing and logistics costs.

‘We’re taking immediate action to reposition our business, so we can get back to driving long-term shareholder value,’ commented Hill. ‘Our team is ready to go, and I’m confident you will see more moments of Nike being Nike again.’

EXPERT VIEWS

AJ Bell investment director Russ Mould commented: ‘Nike is trying to make investors see that its turnaround will be more of a marathon than a sprint, despite reporting better-than-expected quarterly numbers overnight.’

Mould explained that expectations management is important for Nike’s new broom.

‘Hill is suggesting there may be some painful medicine to absorb in the short term but there will be a long-term benefit as the company refocuses on sport and looks to regain customers it lost to upstarts like On and Hoka.

‘The distribution strategy also needs refining after the shift to selling direct to consumer largely failed to deliver. Hill’s experience - he was a senior executive at Nike and worked at the company for more than three decades - should help as he looks to rebuild the brand’s premium credentials and cut down on promotions.’

Broker Jefferies said: ‘We like Hill and applaud his vision, but previous leadership’s mistakes in product and distribution have left Nike vulnerable. It’s now clear Nike’s massive market share is being “Pac-Manned” away by the competition across both performance and classic segments. Guidance indicates severe issues, with newness not guaranteed to improve the situation, as evidenced by significant declines in digital revenues. Bottom line: Just Don’t Buy It.’

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Ian Conway) own shares in AJ Bell.

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