Nike's Turnaround Narrative Clashes with Deteriorating Fundamentals and Rich Valuation

What happened

Nike is undergoing a multi-year turnaround under new CEO Elliott Hill, focusing on performance categories and wholesale channel repair. Recent Q2 results show North America revenue grew 9% year-over-year, but China sales fell 17%, indicating persistent regional challenges. However, SEC filings reveal deeper deterioration, with FY2025 revenue down 10% and net income plummeting 44%, while EBIT margin compressed to 8.2% from 12.7%. Despite the article citing a 43% discount to Nike's 5-year average forward EV/Sales, the master report notes the stock trades at a premium 34x trailing P/E and is 96% above DCF intrinsic value. The master report's potential sell recommendation highlights execution risks from tariffs, competition, and channel shifts that undermine the bullish recovery story.

Implication

The positive growth in North America is overshadowed by steep declines in China and overall financial deterioration, including margin compression. Gross margins continue to be pressured by discounts and new tariffs, with no clear near-term recovery in sight. Valuation metrics indicate the stock is expensive, trading at a premium despite reduced profitability and growth prospects. Execution on the turnaround plan is critical, but past strategic missteps raise doubts about management's ability to quickly restore historical performance. Until there is sustainable evidence of revenue growth and margin improvement, the risk/reward profile appears skewed to the downside for new investments.

Thesis delta

The Seeking Alpha article presents a bullish buy thesis based on turnaround potential and valuation discount, but the DeepValue master report counters with a sell recommendation due to fundamental erosion and overvaluation. This shift from optimism to skepticism emphasizes that investors should prioritize hard data from filings over narrative promises until concrete improvements are demonstrated.