Downgrade NKE from buy to neutral; FY2027 guidance implies 3+ quarters of decline before recovery, so current valuation does not justify buying yet.

Nike recorded another quarter of disappointing results. Sales have fallen by 4% and management expects things to get worse for the rest of the year. I recently upgraded my rating on Nike stock to "buy," and I told you that my concern was that I might have acted too hastily.

For years I warned investors against buying Nike stock, and the stock crashed to around $36 a share, which is the price at which I upgraded the stock to a " buy".

So, I want to take a closer look at these results to decide if I really rushed things, and whether I should downgrade the stock again and remove it from my buy list because this quarter has been so disappointing .

Nike's management team says they remain focused on enhancing the health of their product portfolio, improving productivity across the company , and allocating resources disciplinedly to support long-term shareholder value.

The strategy was consistent: rebuilding relationships with wholesalers that had been destroyed by the previous management team; And reducing reliance on mainstream products, such as "Jordan," which were popular and continue to be released repeatedly in different colors; Expanding the portfolio of products they sell by investing in new products and innovation in order to reignite customer enthusiasm.

Therefore, first quarter sales fell by 4% to 11.2 billion. The gross profit margin rose slightly to 42.8%. Part of the reason is that the tariff barrier was slightly lower in this quarter compared to the same quarter last year.

While other definitions were allowed to remain. The Trump administration tried to reinstate various types of tariffs, but the tariffs were disastrous for Nike and many other retailers who sell products to consumers in the United States, because virtually no one manufactures in the United States , so they pay higher prices to bring these products to market, and this hurts their profits significantly.

Wholesale revenue for the Nike brand is something I'm watching closely because, as I mentioned, this is an area of focus, as the management team wants to rebuild relationships with wholesalers.

Sales decreased by 1% year-on-year. But if you exclude China, there has been growth in North America in this sector. So this is a somewhat positive sign amidst a difficult and challenging quarter.

Nike's direct revenue fell by 8% year-on-year. Even worse, Nike actually spent more money, and continues to spend more, on advertising, promotion, and what it calls demand creation expenses, which rose 5% compared to the same period last year, reflecting higher brand marketing costs .

Therefore, they spent more on marketing, advertising, and similar promotional activities , but this did not lead to the revenue acceleration that the company had hoped for.

It was very clear to me that there was no announcement about a share buyback. Regarding shareholder returns, the company simply stated that it paid out 610 million in dividends, without any share buybacks.

Typically, what I like to see when a company's stock price drops significantly and management talks about their confidence in the recovery strategy is that if you are confident in the recovery strategy and feel that your shares are undervalued, you should buy back some of the shares.

It is supposed to buy back the shares at these low prices. I didn't see any of that here. That was certainly disappointing.

Therefore, they are restructuring the business and expect that these supply chain modernization efforts will contribute to increased bottom line for the company . What they are doing is creating a new campus in India to enhance their institutional capabilities, reorganizing themselves into three geographic regions , and streamlining the organizational structure to further reduce costs.

In other words, the countries where Nike used to manufacture many of its products face higher tariffs, and they want to move to other countries where the tariffs are lower. There is no indication here that Nike will move manufacturing to the United States, which is something the current administration would like to see.

But instead, what many companies are doing is simply moving manufacturing out of China and out of countries with higher tariffs, and moving it to countries with lower tariffs, right?

Because when these companies calculate the cost of production and consider the tariff plus the cost of production outside the United States, it is still much less than moving the entire production to the United States .

Moreover, the current administration has been , to say the least , inconsistent with regard to its customs policies. You know, one day the rate is 50%, the next day 25%, then 100% , the next day it's completely cancelled, and the next day there's an exemption for some companies, and no exemption for other companies.

Therefore, in this kind of changing environment, companies are unlikely to say : "Okay, let's move manufacturing back to the United States because tariffs are too high, and they're going to stay that way, and things aren't going to change, and we can see how things will look, so we can stick to that decision ."

Companies can't really do that at the moment. They are simply trying to improve their situation in any way possible as long as the current administration is in power, and are likely to make long- term decisions when a new administration comes to power.

So, what was really disappointing was the outlook for the rest of 2027. Revenue is expected to decline by high single-digit percentages for fiscal year 2027. They started the year with a 4% decline.

Therefore, for revenues to decline for the entire year by high single-digit percentages, i.e., 7, 8 or 9%, the second, third and fourth quarters will be much worse than the first quarter in terms of sales.

This was extremely disappointing, and far worse than I expected from Nike for its fiscal year 2027.

Nike's stock is trading at a forward price-to-earnings ratio of 16.3. It's the cheapest selling price for Nike stock in a very long time. This is partly why I was early in upgrading Nike stock to a buy opportunity, rating it as a buy, because I saw the valuation reach record lows, and I felt that Nike was probably a quarter or two away from reaching a turning point and sales recovery.

But, based on what I see from the current results and the 2027 forecast, Nike is still very far from recovering in a quarter or two. It looks like there are at least three more quarters of difficulties and worsening conditions before things start to improve, and that's a long time to wait for a company whose fair value , you know, I set at $29.

The current market price is slightly above $30. Therefore, it is not very cheap when compared to its estimated fair value.

Therefore, I will update my rating for Nike stock. It seems I was too hasty in promoting him a few weeks ago when I did that. Therefore, I will lower its rating again to "retain".

I think it's best to wait at least another quarter or two until Nike shows investors that we can at least see when things will turn around, when they will stop falling back, and when the business will stabilize, and then we can make an assessment and feel comfortable about getting into the investment.

Therefore, I don't think this is a buying opportunity. I am downgrading Nike's stock rating again to the hold level.