Why Nike Stock Dropped on Friday

Key Points

• Nike announced yesterday it will replace the CEO of its Converse brand.

• Nike sales sank 10% last year, and its Converse sales fell twice as fast.

• Nike's earnings shrank by 44% last year, yet the stock costs more than 30x earnings.

• 10 stocks we like better than Nike ›

Shares of shoes and sportswear company Nike (NYSE: NKE) gained 1.4% on Thursday before turning tail and losing nearly twice that much Friday. As of 12:45 p.m. ET, the stock is down 2.7%.

Believe it or not, both the gain and the loss may have the same cause.

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Image source: Getty Images.

Converse's new CEO laces up

As Retail Dive reported yesterday, Nike has decided to release Jared Carver from his role of Converse CEO. In an internal memo, the company named Nike Global Men's VP Aaron Cain to take the reins at Converse.

Nike described Cain as a 21-year Nike veteran with "deep global and geography leadership experience," language calculated to get investors excited about the prospect of a turnaround. Unfortunately, Nike may have inadvertently reminded investors that Converse needs a turnaround, and is currently a drag on Nike's bigger business.

In its fiscal 2025 earnings report last month, for example, Nike reported a 10% decline in annual revenue, and a 12% decline in sales for Q4 in particular. Conversely (pun intended), Converse sales plunged 19% for the year, and 26% for the quarter.

Is Nike stock a buy?

Long story short, Converse was overdue for new management. Now that it's got it, business may improve -- or it may not. All investors know for certain is that right now, Nike is a $110 billion stock that earned $3.2 billion last year, valuing the shares at a rich 34.5 times earnings.

Given that sales just fell 10%, and earnings are falling even faster (down 44% last year), it's hard to justify such a rich multiple on a declining stock. Considering that even optimistic analysts don't see Nike growing earnings more than 7% annually over the next five years, it's probably best to just avoid Nike stock for now.

Should you invest $1,000 in Nike right now?

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool has a disclosure policy.