After a soft Nike quarter, we have a big decision to make on the stock

Nike shares fell Tuesday evening despite the company reporting better-than-expected quarterly results. We're running out of patience with this comeback story. Total revenue in the company's fourth quarter of fiscal 2026 fell 1% year over year to $10.97 billion, according to analyst estimates compiled by LSEG, topping Wall Street expectations of $10.86 billion. Earnings per share (EPS) rose 42% year-over-year to 20 cents, beating the consensus of 13 cents, according to LSEG data. This figure does not include the 52 cent benefit to EPS from the expected recovery of IEEPA tariffs, which were overturned by the Supreme Court earlier this year. NKE YTD mountain Nike YTD A nearly 2% decline in shares on Tuesday sends Nike to around $40 per share. The stock is down about 35% year to date before after-hours movement is taken into account. In summary, we've put Nike in the box after the company reported disappointing earnings in March, and results there are unlikely to improve its position in the portfolio. While some parts of the business, namely the enterprise, have made significant progress over the past year under management's "Win now" turnaround strategy, the turnaround is taking much longer than we expected. You might fault management for moving too slowly and not being aggressive enough in properly organizing excess inventory, China being a mess, product innovation lacking, or simply acknowledging that sportswear competition is greater today than it was a few years ago. However, the difficult macro environment was not supportive either. The company said it had a strong start to March, especially in North America. However, outgoing CFO Matthew Friend noted that retail sales slowed in mid-April. The pressure on consumers may be due to the increase in gas prices due to the Iran war, which peaked last month. One positive thing to say this quarter is that management finally appears to be taking aggressive steps to reduce promotions and improve gross margins. Additionally, management reiterated its expectation that earnings per share will be flat year over year, starting this reported quarter and continuing through the first two quarters of fiscal 2027 (a three-quarter period). While analysts' earnings estimates are still slightly better than flat, this guidance does not reflect management significantly trimming the numbers and resetting expectations. That explains why the stock went from a roughly 9% decline to only a modest decline on the post-earnings conference call. Management's decision to prioritize improving gross margin is a positive development and could buy Nike more patience from Wall Street ahead of Investor Day in November, when the company's new CFO will also appear. We believe Nike will eventually bounce back and return to consistent revenue and earnings per share growth. What remains unclear is whether this volatility will be as sharp as the market expects. After all, the competitive environment is not getting any easier. Most importantly, we must constantly ask ourselves whether it is better to invest our capital in Nike or elsewhere. Given the ongoing uncertainty surrounding the company and the few smaller positions we have chosen to build in the portfolio, we believe there are better opportunities elsewhere. We will meet to decide whether a change should be made. Our Club rating on the stock and price target are also under review. Quarterly comments By region, it was disappointing to see sales in North America fall short of expectations for the second quarter in a row, with sales up nearly 3% year over year. Although sales were up from last year, earnings before interest and taxes (EBIT), a measure of operating income (excluding tariff rebates) of $1.014 billion, were lower than $1.045 in the same period last year. China actually did a little better than analysts feared, but we won't be happy about a 12% drop in annual revenue. This is still a problem area that management has not resolved. EBIT fell 20% year-on-year. Regional sales in both Asia Pacific and Latin America (APLA) and Europe Middle East and Africa (EMEA) were above Street expectations. By channel, Nike's wholesale revenue (products sold to third-party retailers) rose 4% on a reported basis and 1% on a currency-neutral basis to $6.6 billion; Growth primarily in North America was partially offset by declines in Greater China. Nike Direct revenue fell 7% on a reported basis and 9% regardless of currency to $4.1 billion; This represents a 12% decline in digital stores and a 7% decrease in Nike-owned stores. The unit reported a small EBIT gain of $23 million, an improvement from a $40 million loss in the third quarter. Converse sales fell 32% year over year to $244 million on a reported basis; This indicates a similar decrease compared to the previous quarter. As for inventories, Nike reported roughly flat levels compared to last year, reflecting an increase in units offset by changes in product mix. Inventory was also nearly flat on a sequential basis. Guidance In its previous earnings release, the company provided guidance that revenues would decline to low single digits year over year for the reported quarter and the first two quarters of fiscal 2027, gross margins would change in the second quarter, and earnings would be flat year over year during that period. We were relieved to hear management reiterate its expectation of stable earnings during this period; Another round of cuts would drag stocks even lower. But some parts of the appearance have changed. Management is sacrificing some short-term revenue by tightening purchases, reducing future discounts and better managing inventory to improve the business in the long term. This means gross margins will improve by a quarter sooner. (Jim Cramer's Charitable Trust is long NKE. See here for a full list of stocks.) When you subscribe to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trading alert before buying or selling a stock in his charitable foundation's portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after issuing the trading alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH THE DISCLAIMERS. NO CIVIL OBLIGATIONS OR DUTIES EXIST OR SHALL BE RESULTING FROM YOUR RECEIVING ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULT OR PROFIT CAN BE GUARANTEED.