Long-time successful companies can hit roadblocks. It's tough to figure out whether it's a temporary setback or a more permanent situation. However, taking a step back to analyze the company's fundamentals can help you make that determination.

It's particularly challenging when it's a consumer discretionary company that relies on keeping up with customer tastes. Nike (NKE -0.23%) seemingly had the Midas touch for a long time. Once a high-flying company with booming sales and profit growth, it's fallen on more difficult days.

Can Nike regain its momentum? Or are the company's best days behind it?

Image source: Getty Images.

Brand power fades

Nike had cool commercials and sports stars' endorsements. These included basketball megastar Michael Jordan. In fact, it seemed like every athlete wore Nike sneakers.

That added up to a powerful and popular brand. Footwear accounted for two-thirds of Nike's $23.9 billion in fiscal first-half revenue, which ended on Nov. 30, 2024. The company's offerings also include apparel and equipment/accessories (such as bags, balls, bats, and gloves).

The company produced high sales and profit growth for a long time. However, they've been faltering. Fiscal second-quarter sales dropped 9% after removing foreign-currency exchange translations, despite increasing marketing expenditures (demand creation expenses on the income statement) by 1%. Management cut overhead expenses, but diluted earnings per share still fell 24% to $0.78.

There have been several reasons for Nike's worsening revenue, including macroeconomic pressures, a lack of innovative new products, and intensifying competition. The last item is troubling as Deckers Outdoor's Hoka brand and On Holding, to name two, have grabbed market share from Nike.

Can it win back customers?

Recognizing the worsening situation, Nike brought back company veteran Elliott Hill as president and CEO last October. One of his strategies is to boost marketing and develop new products, particularly relying more on sports-related footwear and apparel than more fashionable merchandise.

The new CEO has also been pushing for better relationships with retailers while planning to de-emphasize Nike's own direct-to-consumer business. The return to Nike's roots sounds logical since that brought a lot of success in the past.

However, Hill admits that the turnaround will take time. Moreover, it will likely cost more as management invests in product innovation and marketing. In the meantime, there's no guarantee Nike can win back customers that it will need to drive sales growth. In fact, it figures to be a major challenge.

Making the decision

Investors have recognized the challenges facing Nike. The stock has dropped nearly 32% over the past year. During this time, the S&P 500 gained about 21%. The stock's valuation has gotten less expensive. It trades at a price-to-earnings (P/E) ratio of 22, down from over 30 a year ago. Large-cap stocks, measured by the S&P 500, have a P/E multiple of 30.

But long-term investors should be wary. While the valuation may seem tempting, remember, the stock sells at a discount for a reason. In this case, it's worsening results in the face of strong competition.

Hill may succeed, and sales and earnings may get back on track. However, that's a risky bet. I'd advise investors to avoid the stock for now, but keep track of the company. If you see sales improve in tandem with a better gross margin, you'll know the company's going in the right direction.

Until then, I'd stay away from the shares.