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