Nike's disappointing guidance signals its turnaround is farther from finish line than we hoped

CNBC Finance

7 min read

Nike shares tumbled Tuesday evening after the company issued disappointing quarterly guidance, further proof the turnaround is taking longer than expected. Total revenue in the company's fiscal 2026 third quarter was flat year over year at $11.28 billion, topping Wall Street expectations of about $11.24 billion, according to analyst estimates compiled by LSEG. Earnings per share (EPS) fell 35% from the year-ago period to 35 cents, beating the consensus of 29 cents, LSEG data showed. The 9% after-hours drop in shares Tuesday is sending Nike to its lowest levels since 2015. The shoe and apparel maker's stock ended regular trading Tuesday down 17% year to date, underperforming the S & P 500's 4.6% decline over the same period. NKE 1Y mountain Nike's stock performance over the past 12 months. Bottom line Nike believes it is still in the middle innings of its comeback, but it's hard for the market to have faith that it'll win the game when management keeps forcing Wall Street to lower its estimates thanks to weak guidance. To be fair, the company outperformed both its revenue and gross margin guidance in the reported quarter, which covered the three months ended in February. Back in December, management projected fourth-quarter revenue to decline in the low-single digits and gross margins to be down approximately 175 to 225 basis points (1 basis point is equal to 0.01%). The actual numbers were a beat. Revenue end up flat and gross margins contracted 130 basis points, leading to an earnings per share beat of 6 cents. But it was also another quarter that required clearing out of bad inventory, resulting in what management called a five-point headwind to its reported results. This time it was their classic footwear franchise. "It was intentional. It was necessary," CEO Elliott Hill said on the earnings call about the clean out of inventory. "And while it weighed on the quarter, it is improving the health of the marketplace, the quality of our revenue, and the foundation for more sustainable growth ahead." As is often the case in difficult turnarounds, a company could report positive results one quarter and then lower expectations for the next. Stocks generally follow earnings, so when the company takes down earnings expectations, they take down the stock with it. Nike shares will rally when they break this downward revision cycle, but it hasn't happened yet. The company's fourth-quarter guidance was below the Street on both revenue and earnings per share, explaining this steep decline in after-hours trading. What's even more disappointing is that the March-to-May quarter was where many bulls expected Nike to see a big tailwind from the upcoming World Cup soccer tournament being held this summer in North America. Clearly, this turnaround is taking much longer than what management anticipated, and we misjudged where the company was in its "Win Now" initiative when we started buying the stock last fall. This doesn't mean the turn is dead; there's a lot of hard work to go. Still, Hill sounded confident in the direction the business is headed, noting that "by the end of the calendar year, we expect to have finished our 'Win Now' actions." Coinciding with this timeline, Nike plans to hold an investor day in the fall where executives will provide a more comprehensive and long-term view of the business. We would expect this to be an upbeat event, but it's still many months away. We leave the Nike results disappointed for the second quarter in a row, a pattern that typically lands stocks in our "penalty box." What could change is if we see another round of insider buying activity like what happened in December, when Hill and board members Tim Cook, the CEO of Apple , and former Intel chief Bob Swan each made significant purchases. It was wrong to follow their lead last time, but we would think they would have greater conviction this time since the stock has been slammed and management is a quarter closer to finishing their recovery plan. We'll huddle on our rating tomorrow, but for now, we are lowering our price target to $65 from $75 to account for the lower earnings guide. Quarterly commentary By region, it was disappointing to see sales in North America fall short of expectations, growing sales by just 3%. This is the region that is furthest ahead in the turnaround, so the market may take the sluggish sales growth as a sign of a setback. And even though sales increased, earnings before interest and taxes (EBIT), a measure of operating income, fell 11% in the quarter. Gross margins declined 360 basis points versus last year, despite a roughly 650 basis point headwind from new US tariffs. The company believes this means that underlying profitability is improving. China was not nearly as bad as feared, a pleasant surprise. After sales in the region dropped 17% year over year and missed Street estimates by nearly $1.5 billion in the prior quarter, the decline slowed to about 7% in the reported quarter, or 10% on a currency-neutral basis. Sales of $1.62 billion beat analyst estimates by about $100 million. And after EBIT in China fell 49% last quarter to $191 million, it rebounded to a profit of $467 million in the reported quarter, representing growth of 11% year over year. It's an encouraging sign, but a downbeat fourth-quarter China forecast squashed hope that the reported quarter was an inflection point. Asia Pacific and Latin America sales also beat Street expectations, while its Europe, Middle and Africa region missed. Converse sales fell 35% year over year to $264 million, a steeper decline than in the prior quarter. It also reported an EBIT loss of $40 million. That's another business Nike needs to fix. Rebook owner Authentic Brands Group has reportedly expressed interest in buying it if it's put up for sale. But Hill reiterated on the call that it will remain with Nike and is excited about its long-term potential. By channel, Nike's wholesale revenue â products sold to third-party retailers â increased 5% on a reported basis and 1% on a currency-neutral basis to $6.5 billion, with growth primarily in North America. That's a slowdown from the 8% growth last quarter on both a reported and currency-neutral basis. Nike Direct revenue dropped 4% on a reported basis and 7% on a currency-neutral basis to $4.5 billion, reflecting a 9% decline from digital and 5% decrease in Nike-owned stores. As for tariffs, assuming no changes in what's been announced, Nike expects the first quarter of fiscal 2027 to be the final quarter where tariffs create a material headwind to gross margins. As for inventories, Nike reported a 1% decline to $7.5 billion, reflecting a decline in units and product mix shifts, partially offset by increased product costs due to tariffs. Sequentially, inventories declined from $7.73 billion at the end of November quarter. Guidance Nike's fiscal 2026 fourth-quarter outlook was disappointing once again, with management forecasting revenue and gross margin below expectations. Revenue is expected to decline 2% to 4%, with some growth in North America offset by a decline of 20% in Greater China and declines in Converse. At the midpoint of 3%, this outlook is worse than the FactSet consensus estimate of about 2.3% growth. Gross margins are expected to improve sequentially but still be down about 25 to 75 basis points year over year, including a 250-basis point headwind from tariffs. That's below the FactSet consensus estimate of a roughly 50 basis point improvement. Selling, general, and administrative (SG & A) expenses are expected to be flat to slightly down. Earnings are expected to be flattish year over year. Nike earned 14 cents per share in the fiscal 2025 fourth quarter, which is below the current Street estimate for 2026 of 21 cents. (Jim Cramer's Charitable Trust is long NKE. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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Nike's disappointing guidance signals its turnaround is farther from finish line than we hoped

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