After a soft quarter for Nike, we have a big decision to make in stock

Nike shares fell on Tuesday evening despite the company posting better-than-expected quarterly results. Our patience is running out in this conversion story. The company's net income for the fourth quarter of fiscal 2026 fell 1% year over year to $10.97 billion, topping Wall Street expectations of $10.86 billion, according to analyst estimates compiled by LSEG. Earnings per share (EPS) rose 42% from the year-ago period to 20 cents, beating the consensus of 13 cents, LSEG data showed. That figure does not include a 52-cent gain in EPS from the expected recovery of IEEPA taxes — taxes struck down by the Supreme Court earlier this year. NKE YTD mountain Nike YTD A nearly 2% drop in after-hours shares on Tuesday sent Nike to $40 per share. The stock is down about 35% year-to-date before being included in the after-hours move. Important We put Nike in the penalty box after the company reported disappointing earnings in March, and the results here are unlikely to improve its position in the portfolio. Although some parts of the business, namely operations, have made significant progress over the past year under management's "Win now" turnaround strategy, the turnaround is taking longer than expected. You can blame it on going too slow and not being aggressive enough by privileging too much innovation, China still being dirty, a lack of product innovation, or admitting that the competition in sportswear is bigger today than it was a few years ago. However, the tricky nature of macros also did not support it. The company said it has had a good start to the March quarter, especially in North America. However, outgoing CFO Matthew Friend noted that retail sales slowed in mid-April. Pressure on the consumer would have been tied to the Iran war-related increase in fuel prices, which rose last month. One good thing to shout from the quarter is that it sounds like management is finally taking aggressive steps to reduce promotions and improve gross margins. Also, management reiterated its expectation that earnings per share will be negative year-over-year from this reported quarter through the first two quarters of fiscal 2027 — a three-quarter period. While analyst earnings estimates are still slightly better than flat, this guidance doesn't reflect executives cutting numbers and resetting expectations too. That explains why the stock went from being down about 9% at the start of the post-earnings conference call to slightly lower. Management's decision to prioritize improving net worth is a positive development and could earn Nike more patience on Wall Street ahead of Investor Day in November, which will also feature the company's new CFO. We believe Nike will eventually regain its footing and return to consistent revenue and earnings per share growth. What remains uncertain is whether that shift will be as sharp as the market expects. After all, the competitive environment is not easy. Most importantly, we should always ask ourselves whether our money is better invested at Nike or elsewhere. Given the continued uncertainty surrounding the company and several small positions in the portfolio we would like to build, we believe better opportunities lie elsewhere. We will meet to decide if the change will be made. Our Group's stock ratings and target prices are also reviewed. Quarterly analysis Regionally, 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. Even though sales increased from last year, earnings before interest and taxes (EBIT), average operating income of $1.014 billion (excluding tax returns), decreased from $1.045 in the same period last year. China has actually been a little better than analysts feared, but we won't be happy with a 12% year-over-year decline in revenue. This is still a problem that management cannot solve. EBIT was down 20% year-on-year. Both sales in the Asia Pacific & Latin America (APLA) and Europe Middle East & Africa (EMEA) regions beat street expectations. By channel, Nike's revenue — products sold to third-party retailers — rose 4% on a reported basis and 1% on a currency basis to $6.6 billion, with growth primarily in North America, partially offset by a decline in Greater China. Nike Direct revenue decreased 7% on a reported basis and 9% on a currency-neutral basis to $4.1 billion, reflecting a 12% decrease from digital and a 7% decrease from Nike-owned stores. The division reported a modest EBIT profit of $23 million, an improvement from a third-quarter loss of $40 million. Converse's sales fell 32% year-over-year on a reported basis to $244 million, marking a similar decline from the previous quarter. As for inventory, Nike reported roughly flat levels compared to last year, reflecting an increase in units, offset by shifts in product mix. Inventory was also on a sequential basis. Guidance In the previous earnings call, the company provided guidance for the reported quarter and the first two quarters of fiscal 2027, with revenue to be down single digits year-over-year, net income to be in the second quarter, and profit to be smaller year-over-year in this period. We were relieved to hear that management is insisting on lower cash flow expectations this time around - another round of cuts would have sent the stock down even further. But some parts of the vision have changed. Managers sacrifice some near-term profits by strengthening purchasing, reducing future layoffs, and better managing inventory to improve business over the long term. This means that gross margins will improve by one quarter in the near future. (Jim Cramer's Charitable Trust is long NKE. See here for a full list of stocks.) As a subscriber 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 trade alert before buying or selling stock in his charity portfolio. When Jim talks about a stock on CNBC TV, he waits 72 hours after issuing a trade warning before making a trade. THE PRIVATE INFORMATION OF THE BURNING CLUB IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AND OUR PRIVACY POLICY. NO LEGAL LIABILITY OR OBLIGATION EXISTS, OR IS CREATED, BY YOUR ACCEPTANCE OF ANY INFORMATION PROVIDED BY CONTACTING THE INVESTMENT CLUB. NO PARTICULAR RESULT OR INTEREST IS GUARANTEED.