After the sneaker company gave a gloomy forecast the day before, Nike Inc. shares ended the day with their biggest drop ever. This made Wall Street analysts cut back, and some even called into question the company’s management.
On Friday, Nike shares NKE, -19.98% closed 20% lower after being downgraded by several firms, including Stifel, Morgan Stanley, and UBS. The selloff was Nike’s biggest drop in share price in a single day.
An analyst at Stifel, Jim Duffy, wrote in a research note on Thursday that Nike was asking investors to trust newer, unproven shoe and clothing styles at a time when demand was already weak. This made people less confident in the company’s leadership.
“The credibility of management is seriously questioned, and the possibility of a regime change at the C-level adds to the uncertainty,” he wrote.
Nike wants to release a lot of new products quickly because consumers are reluctant to buy things right now because of rising prices. But analyst Jay Sole at UBS had doubts about the company too. He lowered his estimates for the next three fiscal years’ worth of profits per share.
“Our main conclusion is that Nike’s earnings will not quickly rise again,” Sole wrote in a research note on Friday. “We think Nike is starting a business start-up that will last for several years so that it can get back to healthy top-line growth rates.”
His base case top-line forecast also depends on Nike making new, innovative products, but there is no guarantee that this will happen.
Chief Executive John Donahoe said Thursday on a conference call to talk about Nike’s fourth-quarter results that the company saw strong gains in performance products, but declines in Nike’s lifestyle segment more than made up for this. He also said that those drops had “a pronounced impact” on Nike’s online performance.
“These things, along with rising macrouncertainty and worsening foreign exchange, have led us to lower our guidance for [fiscal year] 2025,” Donahoe said.
“NKE’s 4Q24 print was very choppy, and the problems the company is facing are clearly more serious than we (or management) thought,” Wedbush analyst Tom Nikic wrote in a note that came out Friday. “Shares are likely to open significantly lower on Friday after the company missed sales expectations for Q4 and significantly lowered its guidance for FY25.”
Nikic said, “We don’t think many investors will see this as a ‘buy the pullback’ event. We think NKE shares are going to stay in the proverbial “penalty box” until new product innovations start to show up and investors trust management again.” “We are still at Outperform because we think NKE will “figure it out” in the end, but our belief in our thesis has taken a hit.” Wedbush cut its price target for Nike from $115 to $97.
Analysts say that Nike is about to go through a period of change.
“FY25 will be a transitional year with much weaker performance than we expected and what NKE planned three months ago,” Raymond James analyst Rick B. Patel wrote in a note that came out Friday. Patel pointed out that lifestyle products were not doing well, global macro headwinds were getting worse, and the company took a hit on its foreign exchange.
“One could argue that Nike kitchen-sinked FY25, but we don’t have confidence in the upside to revenue (the most important factor) given how tough macro is getting,” Patel said, citing reports from companies like Levi Strauss & Co. that consumers are becoming less demanding. LEVI fell 1.43%, WBA fell 0.78%, and GIS fell 0.71% for General Mills Inc. The analyst also pointed to an unfavorable mix of channels and volatility in China. Nike was lowered from outperform to market-perform by Raymond James.
Ashley Owens, an analyst at KeyBanc Capital Markets, also thinks that fiscal year 2025 will be a transitional year for Nike. This is because the company will be pulling back on some of its biggest franchises for life-cycle management, balancing its wholesale and direct-to-consumer channels, starting new product development and innovation projects, and putting money into brand marketing.
“The above factors, along with a tough macro environment, will likely keep putting pressure on results for the next couple of quarters,” she said.
Owens did say that Nike has a new “Speed Lane” priority to speed up the process of making new products and a goal to double the amount of money that new products bring in by the end of fiscal 2025.
“NKE also said that actions to reduce headcount are complete and that the company is looking for ways to save money in other areas. They plan to reallocate $1B to invest in activities that directly affect customers in FY25 to help support their top line,” the analyst said. “Channel-mix shift and franchise management will be tough over the next few quarters, but we think that balancing NKE’s product lines, channels, and prices could make the company more competitive in the long run.”
The sector-weight rating that KeyBanc Capital Markets gave to Nike did not change.
On the fourth-quarter conference call, Nike CEO Donahoe said that the company is using Speed Lane and its Bowerman Footwear Lab to speed up design. He also said that the company is using digital tools to speed up development. He also said that the athletic-wear giant is working with manufacturing partners to speed up testing and production of products. Six models have already been sped up thanks to this new feature.
Out of the 40 analysts that FactSet polled, 22 rate Nike as overweight or buy, 15 rate it as hold, and three rate it as sell.
So far in 2024, Nike stock is down 30.6%, while the S&P 500 index has gone up 14.5%.
