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In the sports world, no fan is ever very excited when a general manager talks about "rebuilding" when it comes to their favorite teams. Likewise, in the stock market world, when an executive talks about a "transition year" for their company, shareholders generally aren't too thrilled about their investment. Such is the case for NIKE (NKE), which not only missed Q4 revenue expectations, but it also lowered its FY25 revenue outlook, prompting CEO John Donahoe to dub FY25 as a transition year for the company.

• Thanks to some cost-cutting efforts, including a round of 750 layoffs in April at its Beaverton, Oregon headquarters, and $1.0 bln worth of share buybacks in Q4, NKE topped EPS estimates for the fourth consecutive quarter. The EPS winning streak, though, is taking a back seat to NKE's ongoing struggles on the top-line as sales dipped by 1.6%, amplifying concerns that rivals such as adidas (ADDYY), On (ONON), Puma, and Deckers' (DECK) HOKA are cutting into its market share.
• Once an underdog itself, before Michael Jordan catapulted NKE's popularity into the stratosphere, it's both surprising and alarming to see the company's smaller competitors gain ground due to self-inflicted issues. Mr. Donahoe has acknowledged that the company is not performing up to its standards and at the core of its struggles is a lack of innovation.
• In recent years, NKE has banked on its best-selling products -- most notably including the Air Force 1 shoe -- while scaling back on new product development and advertising. Given the considerable supply chain disruptions that materialized during and after the pandemic, it's understandable that NKE would take a more conservative approach, but it's apparent that it has been too slow to reignite the innovation engine.
• This is made apparent by the 8% sales decline in NKE's direct-to-consumer business and the 1% drop in overall sales in the key North America market. A leaner inventory situation at NKE's retail partners helped push gross margin higher by 110 bps to 44.7%, but even that metric fell a bit short of expectations.
• What's really weighing on the stock, however, is the company's downwardly revised FY25 revenue guidance. After initially guiding for positive growth in FY25, NKE is now forecasting a mid-single-digit decline, with a 10% drop expected in Q1. Essentially, NKE's weak outlook suggests that the product innovation initiatives that its undertaking won't bear much fruit this calendar year, generating plenty of disappointment among investors.

The one silver lining is that CFO Matthew Friend stated that he expects meaningful, sequential improvement in 2H25 compared to 1H25, driven by the launch of new products. That optimistic view is providing little solace to NKE shareholders today, though, many of whom aren't willing to stick around for the transition year to play out.