r/valueinvesting
My thoughts on Nike which will be releasing earnings next week
Nike faces severe self-inflicted strategic blunders, inventory issues, and weak guidance ahead of earnings, pointing to a negative report.
- Self-inflicted strategic blunders like abandoning wholesale for DTC and diluting core IP franchises have severely damaged brand equity.
- Structural mismanagement in key regions like China and EMEA, coupled with massive inventory pile-ups, will take much longer to fix than expected.
- Weak Q4 revenue guidance with a high risk of missing the $10.6B threshold, indicating ongoing fundamental weakness.
Nike will be releasing earnings next week. Management already prepared us to not expect any major wins
A lot seems to have gone wrong with the company in recent years, and the worst part is that this seems to mostly have been self-inflicted.
- Went all in direct to consumer, cut wholesale partners, destroyed those relationships
- Flooded the market with AF1, AJ1, Dunks, and killed the heat on some of their best franchises
- They chased lifestyle revenue, and pretty much abandoned the sport performance identity (major strategic blunder imo).
- One of their worst moves was to build a fixed-cost infrastructure for a digital business that never ended up reaching the scale management projected.
- Misread China's channel dynamics and let inventory pile up across digital and wholesale simultaneously
- Its EMEA markets showed structural mismanagement, so the management's response was to paper over it with volume, rather than addressing structural causes of weakness.
- Tried to fix all of it at once from a position of weakened brand equity and elevated inventory everywhere which just worsened things for itself.
Management now insists that they are working to correct these misteps. The main thesis they're trying to push is that the company never lost its fundamental advantages (athlete relationships, innovation capability, brand equity, wholesale infrastructure, global scale, etc.) and all wrongs actually related to discipline.
In prior earning calls, they seem to be pretty explicit that the timeline is longer than they initially suggested and some geographies are messier than initially diagnosed. China and EMEA have structural weaknesses compared to North America, and require more time.
They have guided Q4 revenue to fall between 2% and 4% of last year Q4's total of $11.1 billion. If the reported revenue is below $10.6 billion, that's going to be really negative for the Nike. They're betting on the North American market showing strength, and if that does not play out, their thesis is breaking down.
I'm tracking \\\~24 specific milestones for the company in the upcoming earnings, and will be sharing updates if anyone is interested in them. Right now, shareholders will want to see that Nike can address past failures, and stick to the clean up thesis they are framing.
Personally, I think the stock is expensive right now at 28x forward earnings, especially since the best signal we could be given is that the fundamental decline is slowing, not reversing. I think that's a pretty thin foundation for a 28x multiple.
Strong writeup. I agree the 28x is the crux, but I'd frame the problem slightly differently: the multiple isn't expensive on today's earnings, it's expensive on a denominator that's still falling. EPS is around $1.52 on what used to be a much higher base, so 28x isn't really "paying 28x for Nike," it's paying 28x for a depressed E that the bull case assumes snaps back. The multiple and the earnings recovery are the same bet wearing two hats.
So the honest question isn't "is 28x too high for Nike," it's "what does normalized EPS have to be for this to be cheap?" If they can get back toward prior earnings power over a few years, today's price is reasonable on that future number. If North America strength doesn't materialize and China/EMEA reset structurally lower, then the E never recovers and you're holding a melting multiple. That's why your $10.6B revenue line is the right thing to watch. It's a clean checkpoint for whether the denominator stabilizes.
The part that makes me cautious is the same one you flagged: the best-case signal next week is "decline is slowing." That tells you the second derivative is improving, but you're paying a recovery multiple for confirmation of a bottom, not the recovery itself. Brand equity and athlete relationships are real and probably do put a floor under it, but "fixable" and "fixed" are years apart, and you're paying today for the gap.
Genuinely interested in your 24 milestones. The thing I'd want most is which ones are leading vs lagging. Inventory and China sell-through tell you about the next year. Reported revenue tells you about the last quarter.
Thanks for your comment, I like your framing of how to read the PE ratio! That's a very interesting way to look at it. I'll share the milestones with you once I have them drafted out
I have a big short on Nike. Very bearish on its growth (non existent) prospects
I could see a jump off followed by selloff to new lows. I think it’s a company that is slowly dying and I just don’t see anyone other than those shipping at discount stores who wear Nike anymore. It’s not a brand that can command a premium to the masses and it’s pretty hard to get that back.
$40 today, and analysts expect more downside ahead of its quarterly results on Tuesday. Says it was expect to rise to 43.00? But with this market probably not
It’s gonna keep falling tbh this is still a falling knife rn
Part of my problem with Nike is trying to figure out if they have no idea what they are doing to fix things or that they do know what they’re but still failing. And having those 2 options makes me know I don’t really have a need or want to invest.
28x for a turnaround where the best-case outcome is 'decline is slowing' is a tough sell, and the direct-to-consumer infrastructure writedown risk still feels underappreciated by the market. The 24-milestone framework is the right way to watch this, because the thesis breaks on execution details, not the headline revenue number.
I don't understand why ppl in this sub love to go for falling knife... There is no moat regarding Nike when there are tons of company in china competing for prices in the same space.
should really read the post before criticizing it lol