Nike’s FY25 gets off on the wrong foot, with Hill ready to lead the climb back

Not unexpectedly, Nike reset its business after reporting its worst quarterly sales decline in four years. The group scrapped its full-year financial guidance and canceled its scheduled November investor day as it awaits the formal arrival of new president and CEO Elliott Hill on Oct. 14. Nike shares declined by 5.7 percent in after-hours trading yesterday after EVP and CFO Matthew Friend led Nike’s Q1 earnings conference call alone and described its trajectory ahead.

Given traffic trends within its digital business and essentially flat spring orders, the company has moderated its revenue expectations. The Q2 outlook calls for an 8 to 10 percent revenue drop and a 150-basis-point decline in gross margins with higher promotions, channel mix headwinds, and supply chain deleverage offsetting lower product costs and lowering benefits from earlier strategic pricing actions. Nike expects a mid-single-digit revenue headwind for the remainder of FY25. The company will need to be more promotional to balance the FY and lower elevated inventory levels.

In describing Nike’s plans to re-energize the brand with consumers and wholesalers alike through newness and innovation starting in H2 of its current fiscal year, Friend commented, “That said, a comeback at this scale takes time, and while there are some early wins, we have yet to turn the corner.” 

Analysts weigh in ahead of Q1 results 

Deutsche Bank analyst Kristina Katai told Barron’s, “We think a narrative of gradual improvement will be well received, which should put shares on an upward trajectory as NKE charts a course for renewed growth and market leadership.” Last week, after dropping her estimates on Nike’s likely Q1 sales and gross margin, she reiterated a “buy” rating on the stock and increased her target price to $95 from $92. 

Meanwhile, Truit Securities analyst Joseph Civello told Reuters, “Given the problems that they [Nike] have had, I think it makes sense to kind of reset expectations lower or remove guidance for now and give the incoming team a chance to review the business, see what they think they can fix and how long it’ll take.” 

Q1 results largely met July expectations but were hardly typical

Ebit sank by 21 percent to $1,307 million from $1,648 million for the period ended Aug. 31, as net income tumbled further by 28 percent to $1,051 million from $1,450 million. Total sales fell by 9 percent on a constant-currency basis to $11,589 million from $12,939 million, but gross margin improved by 120 basis points to 45.4 percent from 44.2 percent.

Friend confirmed that the group realized lower unit sales than it forecasted, although average selling prices (ASPs) increased. There was sales softness at Nike Digital and in the company’s partner stores in China. Slightly elevated inventories in that marketplace required Nike to increase promotional activity to drive sell-throughs.

EMEA figures fell in Q1 despite Olympics marketing blitz

The region’s total Q1 revenues declined by 12 percent on a constant-currency basis to $3,143 million from $3,610 million even though the brand and its Jordan business launched a six-week ad campaign around the Olympics that included Nike’s first-ever Twitch livestream, which attracted ten million views. Ebit tumbled by 15 percent on a reported basis to $792 million from $930 million. Direct sales declined by 12 percent, and digital revenues fell by 24 percent, but Nike store sales rose by 3 percent. Wholesale revenues were down by 11 percent. 

Bullish on Greater China despite current challenges

The region’s Q1 Ebit slipped by 4 percent to $502 million from $525 million as retail sales moderated, falling by 3 percent on a constant-currency basis to $1,666 million from $1,735 million. Wholesale revenues rose by 10 percent, but direct (-16%), digital (-34%) and store (-4%) sales were down. 

“The marketplace has been promotional,” said Friend. “We’ve been seeing improvement in full-price realization over the past few seasons as we’ve managed our inventory very, very carefully. But this quarter, we were more aggressive in promotional activity, given the traffic trends and given what we were more broadly seeing across the country.”

The CFO reminded analysts that sports participation is a growth industry in China. Despite its moderation of current expectations, Nike will focus on its strengths in innovation and newness to expand its business across the region in the long term.

The strategy will include making the Nike Direct business more efficient by leveraging its supply chain capabilities and including a higher mix of full-price products in the channel.

The path ahead under Elliott Hill 

Nike is seeing indications that newness and innovation from the group will bring higher sales in the months and quarters ahead. Q1 sales from new footwear products increased by double-digits year-over-year. The company is forecasting the footwear unit to grow by mid to high single digits in spring 2025, with further gains in subsequent quarters, as the brand ramps up its innovation machine under Elliott Hill, who is returning to the company some four years after his 2020 retirement. 

“We expect that the return to strong growth will take time,” said Friend, “but we believe that we have all the right building blocks, especially with Elliott now leading us forward.”