Nike's new CEO plans to go back to basics

Nike’s new CEO Elliott Hill warned of a long road to sales recovery for the sportswear giant, but the veteran executive’s plan to turn the spotlight on sports like basketball and running, allayed some investor worries.

The company said on Thursday it was expecting third-quarter revenue to drop to low double digits after the embattled sportswear seller’s quarterly results beat market estimates.

Elliott Hill, in his first public address as CEO on the post-earnings call, said Nike had “lost its obsession with sport” and vowed to put it back on track by refocusing on sport and selling more items at premium prices.

“The recovery is going to be a multi-year process, but he(Hill) seems to be going back to the roots, back to Nike being Nike,” said John Nagle, chief investment officer at Kavar Capital Partners, which owns Nike shares.

“(Hill plans to shift focus) away from some of the streetwear and fashion that had taken over the brand, the heavy discounting and the neglect of retailers. Just taking it back to what worked,” Nagle said.

Hill, who was with Nike for more than three decades, returned as CEO in October to revive demand at the firm that has been struggling with strategy missteps that soured its relations with retailers such as Foot Locker.

The company also saw its market share dwindle as rival brands, including Roger Federer-backed On and Deckers’ Hoka, lured consumers with fresher and more innovative styles.

Hill also highlighted that a lack of newness led Nike to become too promotional and said he plans to shift to selling more at full price on its website and app.

Shares of Nike, which have lost about half of its value in the last three years, were down about 4% in premarket hours on the muted forecast as some analysts expect short-term margin pressure.

“With another half year of franchise management coupled with investment to reinvigorate the brand, we believe the next four quarters could be the worst of the margin erosion and EPS reductions,” Barclays analyst Adrienne Yih said.

Nike’s forward price-to-earnings ratio for the next 12 months, a benchmark for valuing stocks, was 27.53, compared with 33.47 for Deckers and 32.32 for Adidas.

“A rudderless ship now has a rudder, and a sailor who knows how to drive it,” said Eric Clark, portfolio manager at the Rational Dynamic Brands fund, which owns Nike shares.