Nike (NKE 0.04%) has been through a lot lately.

The world’s largest sportswear brand is going through one of the most difficult phases in its history. Sales have now fallen for three quarters in a row and that decline is expected to continue. After a post-pandemic surge in 2022, sales growth slowed for seven straight quarters, bottoming out this summer with a 10% decline.

At the same time, Nike stock is down 57% from its 2021 peak, giving up significant market share and mindshare to emerging competitors like this one While holding And Decker‘ Hoka brand.

Blame for the debacle was clearly placed on former CEO John Donahoe, who was ousted by the board in September. Because Donahoe specializes in technology rather than retail or consumer products, he seemed to lose sight of the company’s priorities and made tactical mistakes, such as abandoning valuable wholesale partners and pouring marketing dollars into Google searches rather than the kind of brand-building campaigns that which the company is traditionally known for.

Nike brought in long-time company veteran Elliott Hill to right the ship, and Hill hit many of the right notes in his first earnings announcement, saying he wanted to put sports back at the heart of the company and include innovation, design, product development and Accelerate storytelling.

Nike’s latest results suggest the company is still headed in the wrong direction: Revenue fell 8% to $12.3 billion in the fiscal second quarter and net income fell 26% to $1.16 billion -dollars back.

The company’s troubles and the stock’s selloff present investors with a classic dilemma – whether to buy this blue-chip stock on a decline or avoid it as the company tries to reshape its business. After all, not every turn turns around. Under Armour It is known to have collapsed in the mid-2010s and never recovered.

One investor betting on Nike’s recovery is Bill Ackman, the billionaire boss of Pershing Square Capital Management. In the third quarter, Ackman purchased 13.2 million shares of Nike, bringing his total holdings in the stock to 16.3 million shares, currently worth about $1.25 billion.

Image source: Getty Images.

Why Ackman bought Nike

Ackman hasn’t directly addressed his purchase of Nike stock, but the billionaire is known as a maverick and has bet heavily on struggling consumer brands in the past. Ackman, for example, threw himself into it Chipotle stock as the company struggled with the E. coli crisis. With the help of a new CEO, the brand finally managed to overcome the crisis and the stock rose rapidly in the following years.

Ackman appears to be trying to apply the same playbook to Nike. News that Donahoe would be leaving the company came at the end of the third quarter, so it’s unclear whether this triggered Ackman’s additional purchases or whether he had already purchased the stock previously. Accordingly The New York PostAckman supported appointing Hill as Donahoe’s replacement.

The turnaround strategy is taking shape

Nike shares initially rose in the earnings report as second-quarter numbers beat estimates, but investors were disappointed by the outlook.

Hill outlined the key initiatives the company is undertaking to turn around the business. Some of these actions will impact results in the coming quarters. Hill notes that the brand has become too promotional and sees regaining its premium status as the key to its recovery. This means she charges full price instead of relying on discounts. As a result of this strategy, the company plans to reduce excess inventory in less profitable channels in the coming quarters and is reducing its orders for the summer.

This fits with Hill’s intention to put Nike back into a “pull market,” meaning customer demand drives the business rather than aggressive marketing. Hill is also clear that Nike’s product must work for athletes before it can work for consumers, diagnosing the previous challenges and saying, “We have lost our obsession with sports. In the future, we will take a pioneering role in sport and put the athlete at the center of every decision.”

The new Nike boss could hit the ground running since he already has relationships with Nike’s top retail partners, sports leagues, sponsor athletes and other key stakeholders, and he appears to be a good choice to restore the company to its historic leadership position in the industry.

Is Nike a buy?

Management’s forecast made it clear that the turnaround would take time and results would be weak in the second half of the fiscal year. For the third quarter, Nike is targeting a low double-digit revenue decline and a 300 to 350 basis point decline in gross margin, which will result in a significant drop in profits, although the company has not provided any profit guidance.

While that forecast disappointed investors and erased the stock’s initial gains in the report, Nike appears to be on the right track here. It needs to regain the shelf space and premium branding it has lost in recent years.

The stock doesn’t look cheap based on current earnings, but earnings are well below what they could be and we could see a return to earnings growth within a year. Given the stock’s 57% decline, there’s plenty of upside potential if Nike can execute Hill’s strategy.

Investors will have to be patient, but at the current low price, Nike stock has the potential to double or more in the next few years if the trend reverses.