Nike’s (NYSE: NKE) new CEO Elliott Hill warned of a long road to sales recovery for the sportswear giant, but the veteran executive’s plan to turn the spotlight on sports like basketball and running allayed some investor worries.
On Thursday, the company said it was expecting third-quarter revenue to drop to low double digits after the embattled sportswear seller’s quarterly results beat market estimates.
Shares of Nike (NYSE: NKE), which have lost about half of its value in the last three years, were down nearly 7% in premarket hours due to the muted forecast as some analysts expect short-term margin pressure.
Hill, in his first public address as CEO on the post-earnings call, said Nike had “lost its obsession with sport” and vowed to put it back on track by refocusing on sport and selling more items at premium prices.
“The recovery is going to be a multi-year process, but he(Hill) seems to be going back to the roots, back to Nike being Nike,” said John Nagle, chief investment officer at Kavar Capital Partners, which owns Nike shares.
“(Hill plans to shift focus) away from some of the streetwear and fashion that had taken over the brand, the heavy discounting, and the neglect of retailers. Just taking it back to what worked,” Nagle said.
Hill, who was with Nike (NYSE: NKE) for more than three decades, returned as CEO in October to revive demand at the firm that has been struggling with strategy missteps that soured its relations with retailers such as Foot Locker.
Earlier this month, Foot Locker (NYSE: FL) CEO Mary Dillon said Hill was “taking the right actions for the brand” and the retailer was “working closely” with Nike to emphasize newer sportswear styles, including Vomero and Air DT Max.
“(The retailers) they want us to get back to being Nike, and they want us to have the unrelenting flow of innovative products… and they want us to get back to delivering bold brand statements that help drive traffic,” Hill said.
The company’s market share dwindled as rival brands, including Roger Federer-backed On (NYSE: ONON) and Deckers Outdoor’s (NYSE: DECK) Hoka, lured consumers with fresher and more innovative styles.
Hill also highlighted that a lack of newness led Nike to become too promotional and said he plans to shift to selling more at full price on its website and app.
“With another half year of franchise management coupled with investment to reinvigorate the brand, we believe the next four quarters could be the worst of the margin erosion and earnings per share reductions,” Barclays analyst Adrienne Yih said.
At least seven brokerages cut price targets on the stock with some analysts pointing to the lack of a clear timeline for Nike to return to growth.
Nike’s forward price-to-earnings ratio for the next 12 months, a benchmark for valuing stocks, was 27.53, compared with 33.47 for Deckers and 32.32 for Adidas.
“A rudderless ship now has a rudder, and a sailor who knows how to drive it,” said Eric Clark, portfolio manager at the Rational Dynamic Brands fund that owns Nike shares.
