BREAKINGVIEWS-Nike’s boss is on a runaway turnaround treadmill

By Jennifer Saba

NEW YORK, March 21 (Reuters Breakingviews) - Nike NKE.N boss Elliott Hill is running in place. The leader of the athletic-wear maker issued a disappointing sales forecast on Thursday, sending shares down around 7% the next day. When he took the helm last year, the new chief executive had two distinct problems to fix, one short-term and one long-term: first, ditching unwanted inventory; second, jump-starting the brand with fresh sneakers that people actually want. Investors awarding the company an ever-more-expensive valuation have given him the benefit of the doubt on the future, but present pain may force an even harsher snapback.

The company behind Air Jordans reported that revenue for the three months ending February declined 9% year-over-year to $11 billion. The outlook for the next quarter, though, is what sent investors scrambling: Nike anticipates sales to fall in the mid-teen range, more than Wall Street’s anticipated decline of some 12%, according to analysts polled by LSEG.

Part of the challenge is clearing out merchandise that built up under the previous regime of Chief Executive John Donahoe. Inventory dropped a meager 2% to $7.5 billion, well above pre-pandemic levels in 2019 when warehouses had over $5 billion of kicks and apparel. That portends more profit-sapping promotions and discounts on the horizon. Worse, China cannot be counted upon as a growth engine. The top line in the People’s Republic dropped 17% on softening demand and stiffer competition.

Against this backdrop, Hill, now five months into the job, is rolling out new products, trying to repair relationships with wholesalers and emphasizing Nike’s roots in running. He has to balance price cuts while convincing consumers that shoes like the Pegasus premium line are worth a top-tier price.

Investors have given him plenty of road. Nike’s enterprise value as a multiple of forecast next-twelve-months’ EBITDA is well out of whack, reaching 25 times according to Visible Alpha. Adidas ADSGn.DE, Lululemon Athletica LULU.O and Deckers Outdoor DECK.N, home to Hoka, trade at between 12 and 13 times.

Yet a big part of the reason for Nike’s eye-popping valuation is that profit expectations are cratering. Over the course of the past year, analysts reduced EBITDA estimates for the company by 57%. That the stock has not fallen even further than its already-steep slump is likely a testament to investors’ faith in Hill. As he slips further back on the turnaround treadmill, though, that faith may falter.

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CONTEXT NEWS

Nike said on March 20 that revenue for the three months ending February fell 9% year-over-year to $11.2 billion. The athletic apparel maker forecast that the rate of decline will be in the mid-teens range next quarter, worse than analysts’ expectations of a 12.2% drop, according to data from LSEG.

Nike’s shares fell 7% in late morning trading on March 21.