Citi Points to Challenges in Nike's Turnaround as a Reason for Another Downgrade

Citi has downgraded Nike Inc.'s stock from a "buy" rating to "neutral," pointing to the various hurdles the company faces as it strives to regain its footing. Analyst Paul Lejuez explained that after attending a sell-side event where he met with Nike’s new CEO, Elliott Hill, it became clear that the company’s recovery might not unfold as optimistically as previously thought.

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In a note released on Friday, Lejuez expressed doubts about Nike’s ability to achieve significant improvements in both sales and earnings before interest and taxes (EBIT) margins by fiscal 2026. “After discussing the key building blocks and challenges to achieve a turnaround, we no longer believe fiscal 2026 will inflect the way we hoped,” he stated.

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This downgrade follows a tough period for Nike. In 2023, the company faced multiple analyst downgrades after issuing a bleak outlook, which triggered the largest single-day drop in its stock price in history. Since then, Nike has undergone leadership changes and launched an aggressive plan aimed at revamping its business strategy.

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John Donahoe, who had served as Nike’s CEO since January 2020, retired in October 2023. His departure marked a pivotal moment for the company, and leadership transitioned to Elliott Hill, a long-time Nike executive with deep roots in the brand’s culture. Shortly after taking the helm, Hill introduced an ambitious turnaround plan in December, with a renewed focus on Nike’s core strength—sports. This strategy centers on selling premium, full-priced products and moving away from heavy discounting.

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During Nike’s fiscal 2025 second-quarter earnings call, Hill candidly acknowledged past missteps, stating, “We lost our obsession with sport.” According to a CallStreet transcript, Hill emphasized the company’s commitment to restoring the prestige of its Nike Direct business, which includes both digital and physical direct-to-consumer channels. He stressed the importance of positioning Nike as a premium brand within the sports industry, noting that excessive markdowns had diluted the brand’s image.

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However, executing this turnaround won’t be easy. Nike must clear out aging inventory to make room for newer, premium products. This process comes with inherent challenges, especially as consumer preferences shift rapidly in the competitive athletic footwear market. Citi noted that Nike continues to face “topline pressures” as it phases out key product lines without having enough fresh, high-demand products ready to fill the gap.

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Lejuez specifically highlighted the declining performance of three major Nike franchises: the Air Jordan 1, Air Force 1, and Dunk. These once-dominant sneaker lines have been underperforming, and Nike’s strategy involves scaling back these franchises further in fiscal 2026. Unfortunately, without enough innovative products to offset the decline, Nike’s revenue growth could remain underwhelming.

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Another major concern is the company’s profit margins. Nike’s management acknowledged ongoing headwinds affecting gross margins, largely due to efforts to clean up the marketplace. This includes reducing excess inventory and limiting discounting practices that have eroded brand value. Additionally, the company plans to invest more heavily in “demand creation,” which refers to marketing and promotional activities designed to boost consumer interest and drive sales.

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Citi believes that Wall Street’s consensus estimates for Nike’s fiscal 2026 performance are overly optimistic. Lejuez remarked that the timeline for Nike’s recovery has become increasingly uncertain, making it difficult to justify a bullish stance on the stock. “We no longer have the patience or conviction to wait another year,” he concluded.

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According to FactSet data, analysts are forecasting Nike’s fiscal 2026 revenue to reach $46.77 billion, with adjusted earnings of $2.45 per share. For fiscal 2025, the consensus estimates are slightly lower, with revenue projected at $46.07 billion and earnings of $2.07 per share.

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Competition in the athletic footwear space is also intensifying. Nike’s management has acknowledged that the company is losing ground to rivals, particularly in the running shoe category. They admitted that regaining shelf space with key retail partners will be an uphill battle, suggesting that competitors have capitalized on Nike’s recent missteps. “It made it sound like it wasn’t coming easy,” Lejuez commented.

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Among the 41 analysts surveyed by FactSet, 21 maintain an "overweight" or "buy" rating on Nike, while 18 have a "hold" rating and two recommend selling the stock. This mixed sentiment reflects the uncertainty surrounding Nike’s ability to execute its turnaround strategy effectively.

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Meanwhile, Adidas, Nike’s closest competitor, has been performing relatively well. The company recently reported that its fourth-quarter results would surpass expectations, highlighting the contrasting fortunes of the two athletic giants.

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Adding to the chorus of caution, Jefferies analyst Randal Konik released a note on Thursday emphasizing the severity of Nike’s challenges. Konik argued that the company requires a “Cadillac-type change” to regain its former glory. He pointed out that Elliott Hill inherited a business plagued by poor distribution strategies and an uninspiring product lineup. “We believe challenges will last at least a few years, margins will be tough to improve upon, and valuation is just not compelling,” Konik wrote. Jefferies reiterated its “hold” rating for Nike.

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Over the past 12 months, Nike’s stock has plummeted by 31.4%, starkly underperforming the broader market. In comparison, the S&P 500 index has gained 21.7% during the same period. This significant gap underscores the difficulties Nike faces as it works to restore investor confidence and revitalize its brand.

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While Nike’s long-term potential remains strong, the path to recovery appears more complex and prolonged than previously anticipated. As the company navigates these challenges, investors will be watching closely to see if the bold strategies outlined by its new leadership can deliver the desired results.

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