Nike is the world's largest sportswear brand. This year, the company is on a mission to get its stride back. This week, the company posting its first earnings under new CEO Elliott Hill.
Nike beating on the top and bottom lines, but its sales fell 8%. Analysts say it's the beginning of a long turnaround for the company, after what should have been an Olympic gold earning summer. Nike shocked the market.
Shares of Nike are in freefall after they missed on revenue last night and cut their full year earnings guidance. The shares, down 20%, are on pace for their worst day ever. The plunge wiped out 28 billion of Nike's market cap.
The stock is cut in half since the all time high in November of 2021. It's like what's happening is competition eating their lunch. I mean, that's pretty clear to me.
The company blamed its performance on everything from macro challenges to remote employees. It turns out it's really hard to develop a boldly disruptive shoe on zoom. But experts say this was part of a years long series of strategic errors.
When a $50 billion business sees a down 10% quarter. It's not an overnight occurrence. Meanwhile, net sales of emerging competitors Hoka and On running have both increased over 30% in recent quarters.
Even established rivals like Adidas and Asics have seen growth, while Nike has declined. Nike has fallen behind, and I think that's illustrative of the fact that they've had a bit of a lull when it comes to innovation. If you don't have that, then the kind of scale that Nike has achieved isn't worth much if you don't have the growth.
Now all eyes are on Nike's new CEO, Elliott Hill, to turn the company around. Company veteran Elliott Hill is going to come out of retirement like Tom Brady to take the helm. So what happened?
And can Nike's new CEO get the iconic sportswear giant back on track? Since going public in 1980, Nike's formula of marketing around elite athletes helped it become a global superpower. So what makes Nike special?
Well, that's I think, part of the magic of the marketing. So much of retail is storytelling. Nike dominates or historically has dominated storytelling.
We came back from the impossible, from being broken. And that storytelling resulted in strong sales. By 2016, Nike reported annual revenues of $32 billion.
Nike co-founder and former chairman Phil Knight decided he wanted to shift the company's focus towards digital growth before he stepped down as chairman in 2016. In 2020, former Nike board member John Donahoe replaced Mark Parker as CEO of the company. Joining me is John Donahoe.
He is the brand new CEO of Nike. Thank you sir. Thrilled to be here with you.
Nike under Parker. They were hitting their stride when it came to design, resonating with the consumer. The next wave of growth for Nike was going to be in digital.
Donahoe made sense because his background is as a tech executive. He was the CEO of ServiceNow. He was the CEO of eBay, so he came from Silicon Valley.
Under Donahoe, Nike began moving towards a more direct to consumer model, or DTC, by pushing sales directly from its own platforms and stores. What Nike did is they decided, let's focus on DTC. It's a higher margin business.
And of course, they want to keep the best releases for themselves. And therefore they pulled back from some of their long standing partners, like footlocker, for example. For a while, the plan seemed like it was working.
In September 2020, Nike reported digital sales growth of 82%, despite relatively flat revenue for the quarter compared to the previous year. Because of Covid, we all went into lockdown and Nike digital online sales were booming. They were ahead of the game when it comes to retailers selling online because they were first at it and they did extremely well.
Encouraged by the success, Nike began officially limiting ties with retail partners like Dick's Sporting Goods and Footlocker, and cutting others out altogether. This was a bold move. As of June 2021, these wholesale partners still accounted for around 61% of Nike's sales.
But Donahoe seemed to double down on Nike's digital push in an earnings call. Donahoe said the consumer is digitally grounded and simply will not revert back. Here's the problem research shows that DTC doesn't always work the way businesses hope it will.
A 2024 study by BMO Capital Markets found that retailers who sell directly to consumers didn't actually see a relative increase in revenue margins or other profit margins. Everyone thought, oh, if I eliminate the middle person, I eliminate the partner. I'll get their profits.
I'll get their margins. What we showed is it wasn't happening. We realized, no, you don't eliminate the middle person.
You become the middle person. And the middle person isn't necessarily a great place to be if you don't have their scale, if you don't have their expertise. And so everyone had to absorb all the costs of running those operations.
We found those brands did not see a relative improvement in their sales. They didn't see a relative improvement in their profits. It just didn't happen.
What Nike thought was a sales boost from its new digital model may have just been fortunate timing as the world went into Covid lockdown and shopping went virtual in 2021, as lockdowns lifted and consumers started to seek out in-store experiences, Nike's digital growth started stalling. Internally, the company was undergoing layoffs and cost cutting measures that it said were focused on shifting resources and creating capacity to reinvest in our highest potential growth areas. It does appear, according to analysts, that Nike overrotated toward the direct to consumer.
And then when it came back, time for Americans and folks around the world to go shopping again after Covid, Nike just didn't have the same kind of priority and placement on the shelves, and it didn't have those styles that were really resonating with consumers. Nike had also pulled back on developing its running business, during a time when a record number of athletes joined the sport during Covid. It had a big impact.
Nike previously was really integrated into that running community and always speaking to that community, and that gives you authority and credibility in the category. They pulled back on that. At the same time, Nike was also grappling with a slowdown in consumer spending in China.
There's no question that he can blame some of it on macro, but it's the flat line growth in North America which is more suspect and harder to blame on the macro, especially when Adidas is growing its chief competitor because it has more innovative styles that people are really gravitating toward. It became clear that Nike, not firing on all cylinders on the innovation front, was really when the problem started beginning, and it ceded market share to players, particularly in the running space like on and Hoka. Everybody wears these.
Yes. This is the Hoka Clifton Nine. It is the hottest running shoe of the.
Inventory, piled up as consumers started to pull back and turn to other brands. The core problem at the end of the day is that the North American consumer started seeing Nike as being a little bit cheapened because there was such an excess of product. And this goes back to the idea of when you have too much, you become less interesting, you become less popular, you become less cool.
If there's no line outside of a club, most people aren't walking in. Experts say the lesson learned is for retailers to remember what they do best, something Nike may have lost sight of in its effort to become a tech operation. Being a technology company is not what makes you special.
The mantra of tech is disrupt. Everyone wants to disrupt. If you're doing a really great job, sometimes disrupting yourself is a bad thing, and so figuring out how to evolve rather than break, I think, is really important.
By early 2024, Nike started quietly returning to wholesale partners. You're also leaning into wholesale, which is a bit of a change from from Nike. It's been all about direct to consumer.
Sell your on your website, sell in your stores. And now there's a shift y. Coming out of Covid, it was quite clear consumers were also going back into physical retail.
And we recognize that in our movement toward digital, we had over rotated away from wholesale a little more than we intended. So we've corrected that. We're investing heavily with our retail partners.
Foot lockers relationship with Nike seems to have improved substantially. Nike needs them more than Nike thought. That's very important.
It ain't just all DTC. In September 2024, the company announced Elliott Hill would take over for Donahoe as CEO. Elliott Hill is someone that Wall Street doesn't know well, but internally at Nike.
What I hear is he's known very well and very popular. This is a guy that started as an intern at Nike, and has now worked his way all the way up to become CEO. He's a 32 year veteran.
He also came up through the sales channel. So there are great expectations that he will know what produces a hit and will help turn around the innovation problem that Nike has suffered under John Donahoe. In its most recent earnings call.
Hill said the company will focus on clearing out excess inventory and reinvesting in sports marketing. We lost our obsession with sports moving forward. We will lead with sports and put the athlete at the center of every decision.
This is not a story that six months from now we're going to be caring about. This is going to be an 18 month plus. Show me how you're going to compete with all the smaller brands that have come from behind and the customer's fallen in love with.
They need to re reinvigorate. They need to remind people that Nike is special. And so I think if I'm Elliott right now, I think what I'm doing is I'm going back to my product people.
And I'm saying, I don't know what you've been working on in the past. Maybe you have something new, maybe you don't. Let's see, what is this innovation pipeline?
And as soon as we can start telling people we have good product, then we will put really good marketing. Why does Nike win? Well, Nike has the largest research and development budget and Nike has the largest marketing budget.
Last time I checked, winning is winning. As long as. They use that effectively, it's very hard to compete against.
It doesn't mean that new brands can't emerge. It doesn't mean that new brands can't take some share, but it means that Nike should always be able to get it back, as long as they have their eye on the ball.
