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In NIKE's (NKE) pursuit of a comeback, the scoreboard is looking even more daunting today after the company's weak earnings report showed that it fumbled the ball once again in 1Q25. While NKE cleared EPS estimates for the fifth consecutive quarter, thanks to its cost-cutting efforts and a 120-bps yr/yr improvement in gross margin, sales fell by 10.4% to $11.59 bln, missing expectations and representing its worst sales decline since the pandemic-impacted quarter of 4Q20.

Furthermore, the company punted on providing an updated outlook for FY25, citing the upcoming CEO transition on October 14 as the reason why, suggesting that its prior guidance of a mid-single-digit sales decline is looking out of reach. Indeed, if NKE's downside Q2 revenue guidance for a decline of 8-10% is accurate, then an improbably strong 2H25 would be needed to attain that mid-single-digit decline this fiscal year.

• Unfortunately, the weakness wasn't limited to a single area within the business. Most notably, the core North America market took a turn for the worse as revenue decreased by 11% compared to last quarter's more modest 1% dip. The downturn points to even greater share losses to competitors such as Deckers' (DECK) HOKA and On Holdings (ONON), both of which are expected to report double-digit sales growth in their next earnings reports.
• A cornerstone of outgoing CEO John Donahoe's strategy was to build up NKE's direct-to-consumer (DTC) business, which played out perfectly in 2H20 and CY21 as the pandemic drove consumers to its digital channels. However, as the world began to normalize in 2022 and thereafter, NKE was slow to readjust and lost its footing on the product innovation side. Consequently, the robust growth seen 3-4 years ago has vanished, as illustrated by the 13% drop in NIKE Direct revenue this quarter.
• The situation isn't much better on the wholesale side with revenue falling by 8% to $6.4 bln. A byproduct of NKE's strategy to focus on the DTC business was that an opening was created for competitors to grab the shelf space that NKE vacated with new products. One of the main reasons why shares of NKE rallied after announcing the CEO transition on September 19 is the belief that newly appointed CEO Elliot Hill, who previously served as the company's President of Consumer and Marketplace, can rebuild its retailer partnerships.
• Positives were few and far between, but one bright spot was the disclosure that sales of NKE's newer products grew by double-digits in Q1, providing an encouraging data point that its early innovation efforts are starting to pay off. Relatedly, CFO Matthew Friend commented that he's seeing indications of a slight second half improvement in revenue trends versus the first half.

The main takeaway is that NKE's disappointing earnings report provided a painful reality check that it has a long way to go to reach the goal line in its comeback attempt. While we do believe that Mr. Hill is a solid choice to quarterback this comeback, investors should anticipate a methodical and time-consuming approach that could take several quarters to play out.