Investing.com -- Moody’s (NYSE:MCO) Ratings has revised the outlook for NIKE, Inc. to negative from stable while affirming all the company’s ratings. This includes the A1 senior unsecured notes ratings, (P)A1 senior unsecured shelf rating, (P)A1 senior unsecured Medium-Term Note Program ratings, and Prime-1 commercial paper program rating.
The revision in outlook to negative is based on the anticipation that NIKE will see a considerable drop in operating income in the latter half of the fiscal year ending May 2025. The outlook also accounts for the risk that NIKE’s revenue and earnings might start to recover in fiscal 2026, but could remain below historical levels due to a more constrained discretionary spending environment. Consequently, the company’s leverage could stay close to 2x Moody’s-adjusted debt/EBITDA for an extended period.
Moody’s Ratings Vice President-Senior Credit Officer, Raya Sokolyanska, expressed that the strategies implemented by new CEO Elliott Hill are expected to stabilize and eventually return the company to growth over time. This is as the company focuses on scaling product innovation and aims to regain its significant cultural influence. However, Sokolyanska also noted that a more challenging competitive and consumer environment in the U.S. and China could slow NIKE’s recovery.
NIKE’s A1 senior unsecured rating is a reflection of its substantial scale, leading share in the global athletic market, and ownership of one of the world’s most recognized and valuable consumer brands. The company’s long-term market position has been supported by its focus on demand creation, product innovation, and the consumer experience. Moreover, NIKE has consistently maintained conservative financial strategies, including strong credit metrics and liquidity.
However, NIKE’s credit profile is limited by the inherent business risk of the cyclical, highly competitive, and fragmented footwear and apparel industry. It is also constrained by its high concentration of revenue in a single brand. Over the past few years, NIKE has lost market share in the running category and some of its dominant mindshare with consumers. This is attributed to its overreliance on several lifestyle product franchises, focus on digital direct-to-consumer growth at the expense of wholesale relationships, and diminished priority of brand-building in favor of performance marketing.
Under the leadership of new CEO Elliott Hill, the company is in the early stages of an operational turnaround to address these challenges. Revenue is expected to decline by 10% and EBITDA (excluding unusual items, before standard adjustments) by about 40% by the end of the fiscal year in May 2025. This is as the company reduces the supply of key product franchises, clears excess inventory, and faces weaker discretionary spending in the U.S. and China.
A gradual recovery is projected to begin in fiscal 2026 with 1% revenue growth and mid-single-digit EBITDA growth. This reflects the benefits from the change in strategic direction, scaling of new products, and reinvestment in the business. With earnings improvement and lower debt from a potential 2025 bond maturity repayment, Moody’s-adjusted debt/EBITDA is projected to be 2.1x in FY 2025 and 2.0x in FY 2026.
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