00:00:01
Nike is the world's largest
sportswear brand.
00:00:04
This year, the company is
on a mission to get its
00:00:06
stride back. This week, the
company posting its first
00:00:09
earnings under new CEO
Elliott Hill.
00:00:12
Nike beating on the top and
bottom lines, but its sales
00:00:14
fell 8%.
00:00:15
Analysts say it's the
beginning of a long
00:00:17
turnaround for the company,
after what should have been
00:00:19
an Olympic gold earning
summer.
00:00:24
Nike shocked the market.
00:00:26
Shares of Nike are in
freefall after they missed
00:00:28
on revenue last night and
cut their full year earnings
00:00:31
guidance. The shares, down
20%, are on pace for their
00:00:34
worst day ever.
00:00:35
The plunge wiped out 28
billion of Nike's market
00:00:38
cap.
00:00:39
The stock is cut in half
since the all time high in
00:00:42
November of 2021.
00:00:43
It's like what's happening
is competition eating their
00:00:46
lunch. I mean, that's
pretty clear to me.
00:00:48
The company blamed its
performance on everything
00:00:50
from macro challenges to
remote employees.
00:00:53
It turns out it's really
hard to develop a boldly
00:00:56
disruptive shoe on zoom.
00:00:59
But experts say this was
part of a years long series
00:01:02
of strategic errors.
00:01:03
When a $50 billion business
sees a down 10% quarter.
00:01:06
It's not an overnight
occurrence.
00:01:08
Meanwhile, net sales of
emerging competitors Hoka
00:01:11
and On running have both
increased over 30% in recent
00:01:14
quarters. Even established
rivals like Adidas and Asics
00:01:18
have seen growth, while
Nike has declined.
00:01:21
Nike has fallen behind, and
I think that's illustrative
00:01:24
of the fact that they've
had a bit of a lull when it
00:01:27
comes to innovation.
00:01:28
If you don't have that,
then the kind of scale that
00:01:31
Nike has achieved isn't
worth much if you don't have
00:01:33
the growth.
00:01:34
Now all eyes are on Nike's
new CEO, Elliott Hill, to
00:01:37
turn the company around.
00:01:39
Company veteran Elliott Hill
is going to come out of
00:01:41
retirement like Tom Brady
to take the helm.
00:01:44
So what happened?
00:01:45
And can Nike's new CEO get
the iconic sportswear giant
00:01:49
back on track?
00:01:54
Since going public in 1980,
Nike's formula of marketing
00:01:58
around elite athletes
helped it become a global
00:02:00
superpower.
00:02:01
So what makes Nike special?
00:02:02
Well, that's I think, part
of the magic of the
00:02:03
marketing. So much of
retail is storytelling.
00:02:06
Nike dominates or
historically has dominated
00:02:09
storytelling.
00:02:10
We came back from the
impossible, from being
00:02:13
broken.
00:02:17
And that storytelling
resulted in strong sales.
00:02:20
By 2016, Nike reported
annual revenues of $32
00:02:24
billion. Nike co-founder
and former chairman Phil
00:02:27
Knight decided he wanted to
shift the company's focus
00:02:30
towards digital growth
before he stepped down as
00:02:32
chairman in 2016.
00:02:34
In 2020, former Nike board
member John Donahoe replaced
00:02:38
Mark Parker as CEO of the
company.
00:02:41
Joining me is John Donahoe.
00:02:42
He is the brand new CEO of
Nike.
00:02:45
Thank you sir. Thrilled to
be here with you.
00:02:47
Nike under Parker.
00:02:49
They were hitting their
stride when it came to
00:02:51
design, resonating with the
consumer.
00:02:54
The next wave of growth for
Nike was going to be in
00:02:56
digital. Donahoe made sense
because his background is as
00:02:59
a tech executive. He was
the CEO of ServiceNow.
00:03:03
He was the CEO of eBay, so
he came from Silicon Valley.
00:03:07
Under Donahoe, Nike began
moving towards a more direct
00:03:11
to consumer model, or DTC,
by pushing sales directly
00:03:14
from its own platforms and
stores.
00:03:17
What Nike did is they
decided, let's focus on DTC.
00:03:20
It's a higher margin
business. And of course,
00:03:23
they want to keep the best
releases for themselves.
00:03:26
And therefore they pulled
back from some of their long
00:03:29
standing partners, like
footlocker, for example.
00:03:32
For a while, the plan seemed
like it was working.
00:03:37
In September 2020, Nike
reported digital sales
00:03:40
growth of 82%, despite
relatively flat revenue for
00:03:44
the quarter compared to the
previous year.
00:03:46
Because of Covid, we all
went into lockdown and Nike
00:03:49
digital online sales were
booming.
00:03:52
They were ahead of the game
when it comes to retailers
00:03:54
selling online because they
were first at it and they
00:03:57
did extremely well.
00:03:59
Encouraged by the success,
Nike began officially
00:04:01
limiting ties with retail
partners like Dick's
00:04:04
Sporting Goods and
Footlocker, and cutting
00:04:06
others out altogether.
00:04:08
This was a bold move.
00:04:10
As of June 2021, these
wholesale partners still
00:04:13
accounted for around 61% of
Nike's sales.
00:04:17
But Donahoe seemed to
double down on Nike's
00:04:19
digital push in an earnings
call.
00:04:21
Donahoe said the consumer
is digitally grounded and
00:04:24
simply will not revert
back.
00:04:26
Here's the problem research
shows that DTC doesn't
00:04:30
always work the way
businesses hope it will.
00:04:32
A 2024 study by BMO Capital
Markets found that retailers
00:04:36
who sell directly to
consumers didn't actually
00:04:39
see a relative increase in
revenue margins or other
00:04:42
profit margins.
00:04:43
Everyone thought, oh, if I
eliminate the middle person,
00:04:45
I eliminate the partner.
I'll get their profits.
00:04:47
I'll get their margins.
What we showed is it wasn't
00:04:49
happening. We realized, no,
you don't eliminate the
00:04:50
middle person. You become
the middle person.
00:04:52
And the middle person isn't
necessarily a great place to
00:04:53
be if you don't have their
scale, if you don't have
00:04:55
their expertise. And so
everyone had to absorb all
00:04:57
the costs of running those
operations.
00:04:59
We found those brands did
not see a relative
00:05:02
improvement in their sales.
00:05:03
They didn't see a relative
improvement in their
00:05:04
profits. It just didn't
happen.
00:05:06
What Nike thought was a
sales boost from its new
00:05:08
digital model may have just
been fortunate timing as the
00:05:11
world went into Covid
lockdown and shopping went
00:05:14
virtual in 2021, as
lockdowns lifted and
00:05:17
consumers started to seek
out in-store experiences,
00:05:20
Nike's digital growth
started stalling.
00:05:22
Internally, the company was
undergoing layoffs and cost
00:05:25
cutting measures that it
said were focused on
00:05:27
shifting resources and
creating capacity to
00:05:30
reinvest in our highest
potential growth areas.
00:05:32
It does appear, according to
analysts, that Nike
00:05:35
overrotated toward the
direct to consumer.
00:05:37
And then when it came back,
time for Americans and folks
00:05:39
around the world to go
shopping again after Covid,
00:05:42
Nike just didn't have the
same kind of priority and
00:05:44
placement on the shelves,
and it didn't have those
00:05:46
styles that were really
resonating with consumers.
00:05:49
Nike had also pulled back on
developing its running
00:05:52
business, during a time
when a record number of
00:05:54
athletes joined the sport
during Covid.
00:05:56
It had a big impact.
00:05:57
Nike previously was really
integrated into that running
00:06:00
community and always
speaking to that community,
00:06:02
and that gives you
authority and credibility in
00:06:05
the category. They pulled
back on that.
00:06:07
At the same time, Nike was
also grappling with a
00:06:10
slowdown in consumer
spending in China.
00:06:13
There's no question that he
can blame some of it on
00:06:15
macro, but it's the flat
line growth in North America
00:06:18
which is more suspect and
harder to blame on the
00:06:21
macro, especially when
Adidas is growing its chief
00:06:23
competitor because it has
more innovative styles that
00:06:26
people are really
gravitating toward.
00:06:28
It became clear that Nike,
not firing on all cylinders
00:06:32
on the innovation front,
was really when the problem
00:06:34
started beginning, and it
ceded market share to
00:06:37
players, particularly in
the running space like on
00:06:39
and Hoka.
00:06:40
Everybody wears these.
00:06:42
Yes. This is the Hoka
Clifton Nine.
00:06:44
It is the hottest running
shoe of the.
00:06:47
Inventory, piled up as
consumers started to pull
00:06:50
back and turn to other
brands.
00:06:52
The core problem at the end
of the day is that the North
00:06:53
American consumer started
seeing Nike as being a
00:06:56
little bit cheapened
because there was such an
00:06:58
excess of product.
00:06:59
And this goes back to the
idea of when you have too
00:07:01
much, you become less
interesting, you become less
00:07:03
popular, you become less
cool. If there's no line
00:07:05
outside of a club, most
people aren't walking in.
00:07:07
Experts say the lesson
learned is for retailers to
00:07:10
remember what they do best,
something Nike may have lost
00:07:13
sight of in its effort to
become a tech operation.
00:07:15
Being a technology company
is not what makes you
00:07:18
special. The mantra of tech
is disrupt.
00:07:21
Everyone wants to disrupt.
00:07:22
If you're doing a really
great job, sometimes
00:07:24
disrupting yourself is a
bad thing, and so figuring
00:07:27
out how to evolve rather
than break, I think, is
00:07:30
really important.
00:07:31
By early 2024, Nike started
quietly returning to
00:07:34
wholesale partners.
00:07:35
You're also leaning into
wholesale, which is a bit of
00:07:37
a change from from Nike.
00:07:39
It's been all about direct
to consumer.
00:07:40
Sell your on your website,
sell in your stores.
00:07:43
And now there's a shift y.
00:07:45
Coming out of Covid, it was
quite clear consumers were
00:07:47
also going back into
physical retail.
00:07:49
And we recognize that in
our movement toward digital,
00:07:52
we had over rotated away
from wholesale a little more
00:07:55
than we intended. So we've
corrected that.
00:07:58
We're investing heavily
with our retail partners.
00:08:01
Foot lockers relationship
with Nike seems to have
00:08:03
improved substantially.
00:08:04
Nike needs them more than
Nike thought.
00:08:06
That's very important.
00:08:07
It ain't just all DTC.
00:08:10
In September 2024, the
company announced Elliott
00:08:13
Hill would take over for
Donahoe as CEO.
00:08:16
Elliott Hill is someone that
Wall Street doesn't know
00:08:18
well, but internally at
Nike.
00:08:20
What I hear is he's known
very well and very popular.
00:08:24
This is a guy that started
as an intern at Nike, and
00:08:26
has now worked his way all
the way up to become CEO.
00:08:29
He's a 32 year veteran.
00:08:30
He also came up through the
sales channel.
00:08:32
So there are great
expectations that he will
00:08:34
know what produces a hit
and will help turn around
00:08:36
the innovation problem that
Nike has suffered under John
00:08:40
Donahoe.
00:08:41
In its most recent earnings
call.
00:08:42
Hill said the company will
focus on clearing out excess
00:08:45
inventory and reinvesting
in sports marketing.
00:08:48
We lost our obsession with
sports moving forward.
00:08:52
We will lead with sports
and put the athlete at the
00:08:56
center of every decision.
00:08:57
This is not a story that six
months from now we're going
00:09:00
to be caring about.
00:09:01
This is going to be an 18
month plus.
00:09:04
Show me how you're going to
compete with all the smaller
00:09:07
brands that have come from
behind and the customer's
00:09:10
fallen in love with.
00:09:11
They need to re
reinvigorate. They need to
00:09:13
remind people that Nike is
special.
00:09:15
And so I think if I'm
Elliott right now, I think
00:09:16
what I'm doing is I'm going
back to my product people.
00:09:18
And I'm saying, I don't
know what you've been
00:09:20
working on in the past.
Maybe you have something
00:09:21
new, maybe you don't. Let's
see, what is this innovation
00:09:24
pipeline? And as soon as we
can start telling people we
00:09:26
have good product, then we
will put really good
00:09:28
marketing. Why does Nike
win?
00:09:31
Well, Nike has the largest
research and development
00:09:33
budget and Nike has the
largest marketing budget.
00:09:35
Last time I checked, winning
is winning.
00:09:39
As long as.
00:09:40
They use that effectively,
it's very hard to compete
00:09:42
against. It doesn't mean
that new brands can't
00:09:43
emerge. It doesn't mean
that new brands can't take
00:09:45
some share, but it means
that Nike should always be
00:09:46
able to get it back, as
long as they have their eye
00:09:49
on the ball.