Nike Warns ‘Progress Won’t Be Linear’ After Earnings Beat. The Stock Rises Anyway.

Nike’s first-quarter sales are expected to fall roughly 5% from the year-ago quarter. (JIM WATSON/AFP via Getty Images)

Nike’s turnaround plan helped the company sprint ahead of fiscal first-quarter earnings expectations, sending the stock higher in premarket trading Tuesday.

But a full recovery remains distant, executives said, warning that “progress won’t be linear” as the company looks to move past several years of sluggish innovation, product missteps, excessive discounting, and a break with wholesale retailers that introduced the Swoosh’s products to new consumers.

Shares of Nike have shed roughly 30% over the past three years, trading at similar levels as in mid-2018 and erasing most of the gains made during the pandemic-era boom in activewear. The company’s new management team, led by CEO Elliott Hill, has been working to rectify the business by cleaning out inventories to stock up on new styles and fixing relationships with wholesale partners.

The first quarter showed that Nike’s progress continues, writes Randal Konik, an analyst at Jefferies who rates the stock a Buy.

Nike reported earnings of 49 cents a share for the quarter ended Aug. 31, topping analysts’ estimates for 27 cents a share, according to FactSet.

Revenue was better than projected, as well, rising by 1% year over year to $11.7 billion. Wall Street had penciled in $11 billion in revenue, which would have marked a roughly 5% decrease. Wholesale revenues rose 7%. year over year, driven by positive consumer response to Nike’s running products.

Nike expects second-quarter revenue to be down by a low-single digit percentage, in line with Wall Street’s projections for a 3% drop. The company’s spring order book is higher than a year ago, which means it’s likely that full-year wholesale revenue will return to growth.

Gross margins will decline three and 3.75 percentage points, the company said.

Shares of Nike were rising 4.7% to $72.99 in after-hours trading. The stock is down 7.8% this year.

While first-quarter results topped Wall Street’s estimates, and second-quarter guidance was no worse than expected, there’s still work to be done to get the company back to its winning streak—a fact acknowledged by Nike’s executive team on Tuesday.

“I’m encouraged by the momentum we generated in the quarter, but progress will not be linear as dimensions of our business recover on different timelines,” said Matthew Friend, Nike’s chief financial officer, in a press release on Tuesday.

Indeed, the company’s gross margin declined by 3.2 percentage points to 42.2% in the first quarter, largely tied to lower selling prices—reflecting discounts to clear out inventory—and higher tariffs in North America. Net income, while ahead of expectations, still declined 31% from a year ago. The Converse business notched a 27% drop in sales. Direct-to-consumer sales fell by 4%.

More worrisomely, sales in China, one of Nike’s top countries, fell 9% from the year-ago quarter. Foot traffic in stores has been slow, requiring more discounting to drive demand. Hill said the team was “moving with urgency” to improve Chinese demand by focusing on performance wear and bringing in fresh inventory, but noted that these investments will take time to pan out.

“Bottom line: Nike didn’t blow it, but they didn’t prove the turnaround is here either,” said David Bartosiak, stock strategist at Zacks Investment Research.

That said, not all of Nike’s problems are self-inflicted, or even in the company’s control. Consumers in the U.S. are still cautious about spending, management said, and tariffs have become a bigger thorn in the company’s side in the past 90 days. When Nike last reported earnings, most tariffs on Southeast Asia ranged around 10%. Now they’re set closer to 20%. The company predicts that the levies will pose a gross incremental cost of about $1.5 billion on an annual basis, up from a prior forecast of $1 billion.

“We know we have a lot left to prove,” Hill said on a call with investors Tuesday. “What gives me confidence is that through the sport offense, we’re hyper-focused on the athlete. The creative ideas keep coming, and were covering a lot of ground in the marketplace.”

Write to Sabrina Escobar at sabrina.escobar@barrons.com