Nike Just Can’t Do it

Nike’s (NYSE: NKE) shares have plummeted 30% year to date, with a significant drop following their recent earnings report. The decline is attributed to missed revenue expectations, rising costs, and weak demand in key markets. While Nike remains a global leader in its industry, concerns about its current leadership’s experience in retail and branding add uncertainty to its long-term recovery prospects.

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Transcript:

Austin, shares of Nike, well, let’s face it, they’ve fallen off a cliff.

They’re down 30% year to date, which is incredible for an iconic name brand like that, with two-thirds of that occurring after their recent earnings, which is a huge fall for a company in that industry of that size.

An erasure of 20% in a single day, that’s eye-opening.

But the bigger question is, what’s the long-term picture?

Because Nike’s long been considered one of the best-run retailers in its space.

It sets the standard for everyone else.

What are you seeing?

And the bigger question is, is this a long-term opportunity for investors?

Yeah, really great questions there.

So let’s start by just looking at the financial performance so that people can get a sense of what’s in shares lower.

If you look at Q4 of 2024, revenue came in at $12.6 billion.

That was down 2% year over year.

And this missed analyst expectations by $250 million.

That’s a lot of money to miss in one single quarter.

And while earnings per share came in just below $1.99 and that was up in an exceeded forecast by $0.15 per share.

Of course, markets are forward looking and it is the commentary and the forecast that Nike was giving that sent investors running.

So Nike blamed this performance on macro headwinds for its lower-end consumers.

Weak brick-and-mortar sales in China, lumpy demand across Europe, the Middle East, and Africa, and soft demand for some of its classic footwear franchises like Dunks, SB, etc.

And really, you know, hey, there’s a common theme there.

It’s weakening consumer appetite.

And, you know, while Nike is looking at macro headwinds internationally and they’ve called out a lot of markets here, this does appear to be a global trend, a softening consumer demand.

There’s also a strong dollar, which shaved two percentage points off of its reported revenue growth.

Nike can’t really control that, but it does hurt the reality of their numbers here, and it does exacerbate that pressure.

So when we look at what’s going on with Nike, though, it does not look like this sort of growth is industry-wide.

So there are still some shoe companies or some other similar brands that are putting up larger growth.

So you’ve got faster growth from competitors like Swiss shoe company On and Lululemon, which has announced that it’s expanding into soft goods, menswear, and pushing more of their product internationally.

So while there is some softening consumer demand that Nike is citing, it’s not necessarily hitting all brands in this sector.

Nike did lay off about 2% of its workforce this year, and while other companies have gone deeper and done 10% to 20% cuts.

So when I’m looking at these numbers and this sort of softening demand that Nike is seeing, I feel like they need to go deeper than 2%.

2% largely just keeps your head down, costs, even with inflation.

So let’s look at some of the commentary from the CEO, John Donahoe.

So during their conference call, CEO John Donahoe said, fiscal 2022 would be a transition year in which it kicks off a multi-year innovation cycle and invests in more consumer-facing activities to strengthen its brand.

I don’t really know what that means.

That’s extremely light on detail.

So we wanna look on whether or not John Donahoe is believable.

When he says these sort of vague statements about 2025 being a transition year, what does that mean?

Do we believe him?

So let’s take a look at his history.

So he started at Bain, then he moved to eBay.

He was there for a long time and eventually became CEO.

He made a lot of acquisitions, including shopping.com, StubHub, and various classified sites.

He served as a CEO until 2015.

Now under his performance, eBay shares doubled and they did pretty good.

They beat the S&P 500.

Then he moved on to be CEO of ServiceNow between 2017 and 2020.

And he took that role.

It was a cloud computing company.

He served in that position until January of 2020.

And shares under his tenure grew 180% versus 28% for the S&P 500.

So, so far, we’re seeing some really great growth in his two prior tenures as CEO, but they’re tech companies.

And they’re not tech companies that have this sort of reliance on creative and inventory and branding challenges that Nike faces.

So then he moves over as CEO of Nike in 2020, and he has handedly lost to the S&P 500 since then.

So shares are down 25% versus up 66% for the S&P.

So my concern here, when I hear his commentary about 2025 being a transition year and being extremely light on details, looking at his past performance, he’s obviously very talented.

But his best performance has come in the tech sector.

And when you think about Nike, it’s a creative company that relies on things like proper inventory and branding and supply chains.

And there’s other soft strategies with consumer management that so far it does not look like he has managed well.

So I’m actually a little concerned by this performance.

Nike is a world-class company with one of the best-regarded brands globally.

It’s one of the most recognizable logos on Earth.

But it looks like the leader does not have the experience in retail or branding that gives me comfort.

So far, stock performance matches that and reflects what appears to be a new industry facing new challenges for the CEO.

Yeah.

And Austin, I think a few things are worth noting.

Number one, Adidas has really struggled as well as the closest peer towards Nike.

Second, I think a lot of brands that really saw a sense during the 90s and 2000s, we’re now seeing some challenges as they kind of enter midlife, if you will, Starbucks in different industries.

Another great example of this.

And third, how is Nike going to navigate some of the challenges around a lot of consumer-facing activities increasingly being online?

It’s again a different category, but we’re looking at the other day how a lot of these Internet companies like Allbirds have really struggled to get traction, built sustainable advantages.

And for larger companies, their challenge is kind of different, but they are now in a way disintermediated by being in large platforms like Amazon, which have the power.

So how some of these very large kind of fashion and lifestyle brands are going to be able to make it through this.

It’s a tricky balance.

So as you said, it’s going to be all about the leadership to get them there.

I don’t personally know which direction Nike will go, but that is the area investors need to be watching.

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