Nike Earnings Will Test the Strength of Elliott Hill’s Turnaround

A Nike bag is displayed at a mall in Bangkok, Thailand. (Lauren DeCicca/Getty Images)

Key Points

• Analysts project Nike to report adjusted earnings of 37 cents per share on $12.2 billion in revenue for the fiscal second quarter.
• Nike’s second-quarter sales are expected to decline by 1.2% year-over-year, aligning with guidance for low-single-digit percentage drops.
• China sales fell 9% year-over-year in the fiscal first quarter, with basketball and sportswear categories needing recovery for overall growth.

Nike’s turnaround under CEO Elliott Hill got off to a promising start. But after a little over a year in the job, he now has to prove to investors that early efforts can lead to sustained, stable growth for the activewear giant.

Fiscal second-quarter earnings, due Thursday afternoon, could make or break his case.

Consensus estimates see Nike posting adjusted earnings of 37 cents a share on $12.2 billion in revenue, which would mark a 1.2% year-over-year sales decline.

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The projections are in line with Nike’s previously issued guidance calling for second-quarter sales to fall by low-single-digit percentages, reflecting the nonlinear nature of the company’s ongoing turnaround efforts. Executives have warned that some quarters will be stronger than others as the new initiatives take hold.

Nike has refrained from providing full-year guidance for several quarters now as it works on the turnaround. Instead, it has issued guidance for the following quarter, which many investors parse for signs of sequential improvement, or that the business is improving quarter by quarter.

“Nike is likely going to continue to strike a balanced tone between the early wins on its turnaround efforts and the substantial work that still needs to take place to return to profitable, sustainable growth across its four geographic regions,” wrote Cristina Fernández, an analyst at Telsey Advisory Group.

Analysts expect management will tout advances the company has made in clearing out old inventory and fixing relationships with key wholesale partners.

Executives will also likely highlight the company’s strong performance in the running category, driven by new models such as the Vomero 18 and the Pegasus Premium.

But while the early wins in running are encouraging, for Paul Lejuez, an analyst at Citi, the real question is: When does the rest kick in?

For the turnaround to work, Nike needs to get basketball and sportswear, or casual products, working again, Lejuez wrote. He estimates that these two categories comprise over 50% of Nike’s sales.

Recovering momentum in China is also important, Lejuez added. Fiscal first-quarter sales fell 9% year over year in China, and third-party data suggests that sales in one of Nike’s most important regions remained soft throughout the quarter, pressured by rising competition and a lack of innovation.

“We believe the trajectory of China sales and the basketball/sportswear category will be the key levers needed for upside vs our [estimates], and we do not believe we will hear enough this [quarter] (except some positive commentary on new basketball innovation) for the market to get incrementally positive on F27,” Lejuez wrote.

Nike stock closed 2.1% lower on Wednesday. Shares are down 13% this year.

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