Nike's turnaround put to test as Middle East conflict poses new risks

By Savyata Mishra and Aishwarya Venugopal

April 1 (Reuters) - Nike's NKE.N months-long turnaround under CEO Elliott Hill faces fresh pressure as the Middle East conflict adds to the sportswear maker's struggles in key market China.

Shares of the company slumped 15.5% to a more than decade-low of $44.63 at market close on Wednesday, after the sportswear giant signaled a steep fall in current-quarter sales and a 20% decline in China, on pace for the eighth straight drop.

Hill, who took the helm in 2024, has looked to reset the business as the company grappled with a sluggish digital business, stubborn excess inventory and intensifying competition from Chinese sportswear brands such as Anta 2020.HK and Li Ning 2331.HK, which have deeper connections with Chinese consumers.

TURNAROUND IN TURMOIL

The turnaround "is taking longer than I would like," Hill said on Nike's third-quarter earnings call.

"If Nike's recovery is a marathon rather than a sprint, then the company seems to be hitting a wall," said Russ Mould, investment director at AJ Bell.

"Pleas for patience from CEO Elliott Hill, a Nike lifer, who returned from retirement to lead the company, are falling on deaf ears."

Major sportswear makers including Nike and Adidas ADSGn.DE have been hit by their heavy reliance on manufacturing hubs in Southeast Asia, leaving them exposed to steep U.S. tariffs on imports from Vietnam and other countries.

Nike has also lagged competition due to years of strategy missteps and lack of innovation.

Meanwhile, Chief Financial Officer Matthew Friend said on the earnings call that the conflict in the Middle East is disrupting shopping behavior across its Europe, the Middle East and Africa business.

"The Middle East conflict is compounding the pressure, with Nike flagging traffic disruption and elevated inventory across EMEA," said Josh Gilbert, market analyst at eToro.

SOME SUCCESS

To boost margins and bolster investor confidence, Hill has moved to rein in promotions, sharpen product innovation and refocus the business on core franchises such as running.

The efforts seem to be paying off, with the running category growing more than 20% in the reported quarter.

Analysts, however, were not impressed.

"We are turning at least somewhat frustrated, with (the) seemingly slower-than-planned pace of recovery," Oppenheimer analyst Brian Nagel said.

The company's forward price-to-earnings multiple, a common benchmark for valuing stocks, is 25.47, compared with 13.54 for Adidas and Under Armour's ratio of 25.72, according to LSEG data.

Nike's stock has slumped nearly 71% as of last close after hitting a record high of $179.10 in November 2021.

"These earnings show Nike is keeping pace at a steady jog, but it keeps tripping over hurdles along the way," eToro's Gilbert added.

"Patience is clearly the price of admission."