Affluent tycoon Bill Ackman Places Sizeable Wager on Nike. With a 57% Drop, Is the Athletic Apparel Brand Prepared for a Resurgence?
Nike (NKE -0.23%) has been going through a rough patch recently.
The globally recognized sports apparel giant is enduring one of its toughest periods in its existence. For the third consecutive quarter, the revenue has plummeted, and this downward trend is anticipated to continue. Following a post-pandemic boom in 2022, the growth rate slowed down for seven consecutive quarters, hit a low with a 10% decline this summer.
During this time, Nike's stock has dropped by 57% from its peak in 2021, and it's noticeably ceded market share and attention to newcomers such as On Holding and Deckers' Hoka brand.
The blame for the predicament was passed onto former CEO John Donahoe, who was dismissed by the board in September. As a tech expert rather than retail or consumer goods veteran, Donahoe appeared to overlook the company's priorities and made questionable decisions, such as abandoning lucrative wholesale partners and directing promotional funds towards Google searches instead of conventional brand marketing campaigns.
To steer the company back on course, Nike appointed Elliott Hill, a long-time company insider. During his first earnings call, Hill indicated his aim to prioritize sports, accelerate innovation, design, product creation, and storytelling.
Nike's most recent earnings report revealed that the business is still moving in the wrong direction, with revenue in the fiscal second quarter decreasing by 8% to $12.3 billion and net income dropping by 26% to $1.16 billion.
Investors face a classic dilemma - whether to purchase this blue-chip stock at a discount during the downturn or avoid it until it attempts to transform its business. After all, not every turnaround succeeds. Under Armour suffered a significant decline in the mid-2010s and hasn't fully recovered since.
Bill Ackman, the billionaire head of Pershing Square Capital Management, is one investor who believes in Nike's comeback. In the third quarter, Ackman purchased 13.2 million shares of Nike, increasing his total stake to 16.3 million shares, valued at around $1.25 billion currently.
Why Ackman purchased Nike
Ackman hasn't publicly commented on his Nike stock acquisition, but he's renowned for taking contrarian positions and backing distressed consumer brands. For instance, Ackman bought into Chipotle stock during its E. coli crisis. With the assistance of a new CEO, the brand eventually overcame its issues, and the stock surged in subsequent years.
Ackman appears to be employing a similar strategy for Nike. The fact that Donahoe would be stepping down was announced late in the third quarter, so it is unclear if that precipitated Ackman's additional purchases or if he was already buying the stock. According to The New York Post, Ackman supported the selection of Hill as Donahoe's successor.
The turnaround strategy starts to shape up
Nike stock initially rose on the earnings report due to its second-quarter numbers surpassing estimates, but investors were displeased with the outlook.
Hill outlined the key measures Nike is taking to revive the business, and some of these will impact results over the near term. Noting that the brand has become overly promotional, Hill believes that regaining its premium status is crucial to its recovery, which means charging full price rather than relying on discounts. Consequently, the company intends to liquidate excess inventory in less profitable channels during the subsequent quarters and is reducing its summer orders.
This aligns with Hill's aim of returning Nike to a "pull market," where customer demand drives the business rather than aggressive promotion. Hill also acknowledges that the product needs to be effective for athletes before it can appeal to consumers, as he diagnosed the earlier challenges, stating: "We lost our focus on sports. Going forward, we will prioritize sports and place the athlete at the center of every decision."
The new Nike CEO has hit the ground running due to his pre-existing relationships with top retail partners, sports leagues, sponsored athletes, and other essential stakeholders, making him a suitable choice to reinstate Nike to its historical leadership position in the industry.
Is Nike a buy?
Management's forecast made it clear that the turnaround will take time, and the results for the second half of the fiscal year will be weak. For the third quarter, Nike is aiming for a revenue decline in the double-digit percentages and gross margin compression of 300 to 350 basis points, leading to a substantial decline in profits, although the company didn't offer bottom-line guidance.
While this forecast disappointed investors and erased the stock's initial gains, Nike appears to be heading in the right direction. It needs to reclaim the market share it has lost in recent years and the premium branding it has surrendered.
The stock doesn't appear cheap based on current earnings, but profits are well below their potential, and there's a solid chance for profit growth within the next year. Given the 57% drop in the stock, there's significant upside potential if Nike can execute Hill's strategy.
Investors will need to show patience, but at the current discounted price, Nike stock has all the makings of a double, or even better, in the coming years as the turnaround narrative unfolds.
In light of Nike's financial struggles, some investors are considering whether to invest in the company's stock at a discount during this downturn. Notably, Bill Ackman, the billionaire head of Pershing Square Capital Management, has increased his stake in Nike, indicating his belief in its comeback.
To revive the business, Nike's new CEO, Elliott Hill, has outlined a strategy that includes focusing on sports, regaining the company's premium status, and liquidating excess inventory. Hill aims to return Nike to a "pull market," where customer demand drives the business, rather than relying on aggressive promotion. He also plans to prioritize the athlete and place them at the center of every decision, in an effort to reclaim the market share and premium branding that Nike has lost.
[Investing, finance, money] During this challenging period for Nike, some investors are considering whether to invest their money in the company's stock, hoping to reap the potential rewards of the turnaround strategy. With Bill Ackman, a known contrarian investor, increasing his stake in Nike, it is evident that some view this as an opportunity to invest in the famous sports apparel giant at a discounted price.
