We last covered Nike this time last year (here) with the stock trading ~$US76, following a weak quarterly and disappointing guidance for the year ahead. The shares ultimately fell into the low $50’s before consolidating in the $60’s. However, last week was a potential turning point as their ‘Win Now’ strategy shows signs of working. While the fact that sales dropped less than feared is not super bullish, this is a big ship to turn around, and incremental changes in trends are important.
Of note to MM, was a distinct change in commentary, with a renewed focus on sport rather than leisure – this is a back-to-the-future moment for Nike. In the early 2000’s, Nike was primarily performance-focused, dominating athletic footwear and apparel, but in 2007, that changed with the launch of a retro-inspired range and casual items. Between 2010 and 2015 that trend grew rapidly as people donned active wear when they weren’t necessarily being active! The focus became fashion over performance. Nike lost its way from 2015 onwards, amplified by a material change in how they distributed product, focusing on selling direct to consumer online and via their own branded stores, away from traditional wholesale channels. The strategy didn’t work, or at least, the extent to which they cut out wholesale channels cost them.
We now see Nike re-engaging with wholesalers and turning focus back towards sport/performance-based products under the leadership of Elliot Hill, having retired in 2020 (when the shares were trading above $US100), Hill is now the main man, having spent over 32 years at Nike, helping to orchestrate their success in the early 2000’s.
At last week’s update, Hill announced quarterly revenue of $US11.10 billion, down -12% year-on-year , but ahead of downbeat expectations. The stock has been under pressure for a while, underperforming the S&P by ~20% over the past 12-months, however, it appeared to MM that some green shoots are now emerging. “The fourth quarter reflected the largest financial impact from our Win Now actions, and we expect the headwinds to moderate from here”. Win Now refers to their turnaround plan implemented by Hill in 2024. There are 5 key components to the strategy, but at its core, it is about a renewed focus on sports and innovation and how these products will be developed, marketed and distributed.
- The analyst response was very positive to last week’s update, with 16 analysts changing price targets for an average increase of +14%. There were no downgrades on the numbers, and the market is now warming to the positive changes being put through the business.
FY26 will remain challenging (May year-end), however, if consensus forecasts prove largely correct, NKE will start to reap the rewards from FY27 onwards, with earnings growth returning to strong levels (compounding at 20% for the subsequent 3-years). We are drawn to strong global brands with market dominance. We also believe Nike is in a unique position to capture growth from emerging markets in the coming years, with their credible Win Now strategy addressing the issues that impacted their performance from 2020 onwards.
- MM is adding Nike back onto the Hitlist for the International Equities Portfolio.
