MW Nike just laid out an ambitious turnaround plan. But it will come at a cost.
By Bill Peters
New CEO Elliott Hill wants to focus more on athletes and sell higher-priced shoes at its stores. But efforts to clear out old styles will hit profits and sales.
Elliott Hill, Nike Inc.'s new chief executive, said Thursday that he wants to turn the company around by making gear that's more deeply informed by athletes' input, after pushing streetwear sneakers and losing its "obsession with sport." And after running deep discounts, he said he wanted to make Nike's $(NKE)$ own physical and online stores a destination for premium, full-priced products.
He also said he wants to rebuild trust with retail chains who feel spurned by the sneaker maker. To help those moves resonate, he wants to reinvest in marketing, and rearrange its teams on the ground to connect with athletes and influencers.
Hill conceded that the path back to stronger growth wouldn't be easy. But after speaking with retailers, sports leagues and company staff, he said: "The consistent feedback we've heard is pretty simple: Let's see more of Nike being Nike."
But in the process of being more Nike, sales up ahead will suffer, as the company embarks on those plans and runs a massive clearance on its older and classic sneakers in an effort to make space for the newer stuff. While that might be good for shoppers looking for a deal, it also means Nike will make less money on those items.
Executives on Thursday said sales for Nike's fiscal third quarter would likely be down by "low double digits." Margins, they said, would also be down from last year. Its fourth quarter, Chief Financial Officer Matthew Friend said, would see a "greater headwind" compared with the current third quarter.
After initially rallying after hours on Thursday, Nike's shares were down 1%. The stock has fallen nearly 30% so far this year.
Nike in October said it would pull its full-year outlook to give Hill time to craft a plan for the company. The company said it would only provide quarterly forecasts for the rest of the fiscal year, which runs through May.
Nike's stock got a lift in September after the company announced that Hill, a longtime veteran at the company, would take over as chief executive. But those gains fizzled by the following month, when Hill officially took the job, amid a demand backdrop that analysts expect to remain sluggish as consumers grapple with higher costs to get by.
Under Nike's previous chief executive, John Donahoe, the company drew criticism for overloading the market with retro sneakers that, for some, lost their appeal, and competition increased. The company tried to change course and speed development with newer offerings.
But ahead of Thursday's quarterly results for Nike's fiscal second quarter, Oppenheimer analysts cautioned that even as the athletic-gear giant pushes newer fare, those items were "still small against a massive, global product portfolio, and that noticeable sales strengthening, as a result of improved innovation, will take time to develop."
Nike reported fiscal second-quarter net income of $1.16 billion, or 78 cents a share, compared with $1.58 billion, or $1.03 a share, in the same quarter last year. Revenue fell 8% year over year to $12.4 billion.
Analysts polled by FactSet expected Nike to report earnings per share of 63 cents, on sales of $12.11 billion.
During that quarter, retail traffic suffered and markdowns persisted. Sales in China fell. During the call, Hill said Nike's digital platforms were delivering a "roughly a 50/50 split" on full-price sales.
"Prioritizing Nike digital revenue has impacted the health of our marketplaces," he said.
Management, over recent months, has said it needed to work more with outside retailers, after turning away from them for years to prioritize digital sales and sales at its own locations. Mary Dillon, chief executive at Foot Locker Inc. $(FL)$, which sells a lot of Nike shoes, said during its earnings call this month that Hill and Nike were "absolutely taking the right actions for the brand and the overall marketplace."
Still, Jefferies analyst Randal Konik, in a research note on Thursday, said that Nike's loss of market share was unlikely to stop anytime soon.
"We would not chase shares here," he said.
-Bill Peters
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December 19, 2024 19:51 ET (00:51 GMT)
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