Nike is getting a new CEO. Will its earnings shed light on the path forward?

By Bill Peters

Earnings Watch: Levi Strauss, big food-industry names also report

After a months-long consumer flight from new sneakers and new clothing, Nike Inc. is bringing in a new chief executive. Investors liked the news. But analysts say there's still lots of work ahead for the company.

On Tuesday, markets will get an update on the state of that work when Nike (NKE) reports fiscal first-quarter earnings. Heading into those results, the bar was low, as inflation keeps shoppers cautious.

Some analysts said that even if those results came in better than expected, Wall Street's reservations could be hard to shake. But others said that with a new CEO on the way, investors could cut the company some slack.

Shares of Nike rallied on the news of the leadership change, which will put company veteran Elliott Hill in the CEO role on Oct. 14, while its current one, John Donahoe, will retire from that role on Oct. 13. The company's executive chair, in announcing the change, cited "the past performance of the business," as well as Hill's experience - more than three decades, including top roles in Europe and North America, and heading up marketing for Nike and Jordan brands before his retirement in 2020.

Still, shares of Nike are down 17.6% so far this year, and down 6.5% over the past 12 months, as higher prices for essentials keep shoppers' spending trained on the things they absolutely have to buy. For many, those essentials have generally not included sneakers.

But Nike has faced other difficulties. Competition from brands like Hoka and On Running has increased. Its direct-to-consumer business - that is, its own physical stores and online retail network - has faltered and faced operational snags as it expanded and went head-to-head with rivals. Demand remains uncertain in China, which is rolling out a stimulus package in an effort to plug up deepening fissures in its economy.

Nike did not respond when asked whether Hill would be offering any remarks during Tuesday's earnings call with analysts. Any take from Hill could offer clues on how he might lead, what has gone wrong for Nike and what he might do differently.

More detail will also likely arrive on Nike's investor day, currently set for Nov. 19. However, some analysts expect the shakeup at the top to push back the timing of that event.

Donahoe, who became chief executive in 2020, steered Nike through the upheaval of the pandemic. But analysts have worried about leadership's strategic focus, which has included cutting costs, accelerating development of new sneakers, backing away from the classics, focusing more on its Jordan brand and women customers, as well as a more concerted push within physical retail, after turning away from it to grow its digital business.

Still, some analysts said that with new leadership on the way, investors might be more willing to forget about those difficulties for now. And some said the results may very well show signs of improvement.

"We believe many investors are expecting negative commentary/ potentially lower guidance and would be willing to look past some near-term weakness for future growth potential," Truist analysts said in a research note last week.

They said that Nike would likely use its latest round of results as a chance to emphasize that they understand what's not working for the company. Still, the analysts said investors might have to live with a lack of clarity for a while, given the changes to come. And they said it would take at least a year and a half for any new products under new leadership to hit shelves.

Still, Raymond James analyst Rick Patel, in a research note last week, found nearer-term things to like. He cited "positive Nike call-outs" - from chains like DSW, Famous Footwear and Kohl's Corp. (KSS) - and said their online checks found fewer markdowns and sales events on Nike products, a sign the company was clearing less-wanted product and possibly seeing better demand.

Still, he said Nike's digital business continued to face challenges.

"Our checks show persisting headwinds for Digital, including ongoing [year-over-year] declines for downloads of the Nike app, monthly active users of the Nike app down >20%, and continued declines in Google searches," he said. "The ongoing de-emphasis of classics including Air Jordan and Dunk is also a near-term headwind."

BofA analyst Lorraine Hutchinson, in a research note this month, said Nike's investors might have to wait for updates on any new vision for the company

"The announcement that Elliott Hill will take over as CEO likely pushes out the timing of the Analyst Day and an update on the longer-term plan," BofA analyst Lorraine Hutchinson said in a research note.

"In the near term," she continued, "a narrative of gradual improvement with milestones along the way would allay concerns of another earnings cut and should pave a path to better stock performance." She kept her buy rating on the stock.

Carnival Corp. (CCL), Constellation Brands Inc. (STZ) and (CCL) Paychex Inc. (PAYX) also report earnings during the week.

The call to put on your calendar

Levi Strauss & Co.: Thanks to inflation, demand for clothing, like sneakers, hasn't been great either. Levi Strauss & Co. (LEVI), which reports results Wednesday, faces a lot of the same concerns as Nike, and it is trying to attack them in similar ways - in part by throwing lots of new clothing at reluctant consumers. The company in June talked about broader ambitions to push a "denim lifestyle" - which would include clothing like dresses and tops - and said denim products that weren't pants were "selling like crazy." Sales of looser-fitting jeans, which have risen in popularity, have also jumped. And while shares have rallied this year, the company has warned of higher near-term costs as it changes up how it ships clothing to stores and customers, and it recently said it would push back longer-term sales goals.

The numbers to watch

Food-industry sales: Higher prices at the grocery checkout are at the heart of many customers' inflation-related anxieties. Higher prices at restaurants are making people think twice about dining out. This week, we'll hear from some of the food industry's biggest companies, some of which do do business with supermarkets and restaurants alike: Spice-maker McCormick & Co. Inc., (MKC); French-fry maker Lamb Weston Holdings Inc. (LW); United Natural Foods Inc. (UNFI), which distributes food for upscale supermarket chain Whole Foods; egg producer Cal-Maine Foods Inc. (CALM) and Slim Jim and Healthy Choice maker Conagra Brands Inc. (CAG). The results will offer more sense of how much people and businesses are seeking discounts, and how much the industry can still charge, as prices overall start to rise more slowly.

-Bill Peters

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09-29-24 1001ET

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