As sneaker makers try to stay relevant amid waning demand, Nike Inc. executives on Thursday said they were banking on “newness and innovation” to win over reluctant shoppers. And as sales deals on shoes proliferate, they said interest in its sneakers that cost over $100 is still solid, and that an expansion of its Jordan brand — beyond basketball gear and shoes — represents an opportunity to boost profits.
But one analyst on Friday cast doubt over whether those plans will work for all of Nike’s
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customers in the long term.
“Nike needs improved marketing outside of basketball, streetwear and lifestyle trends,” TD Cowen analyst John Kernan said in a research note on Friday. “Innovation at the higher end of its assortment is not resonating at scale while . . . Nike faces disruption from smaller competitors in footwear and apparel. Jordan brand moving into lower price points and away from a scarcity model creates risk to the fastest-growing piece of the business.”
That assessment came after Nike’s quarterly results and dimmer outlook after the market close on Thursday sent shares reeling. Management said that consumers were still cautious, as higher prices for essential goods siphon away what they can spend on new sneakers and clothes.
Following the results, TD Cowen analysts on Friday downgraded the stock to their version of a hold rating. CFRA, meanwhile, also lowered its opinion on the stock to sell from hold.
Shares of Nike were down 11.6% on Friday.
During Nike’s fiscal second quarter, sales trends were shaky in both the athletic-gear maker’s digital channels and its markets abroad, executives said Thursday. In North America, sales slipped 4% year over year. For the holidays, sales were softer outside of the big discount days like Black Friday and Cyber Monday. And competition from the likes of Adidas
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Deckers Brands
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subsidiary Hoka One One and running-shoe maker On Holding
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hasn’t gone anywhere.
Nike’s results, Kernan said, were a sign that Wall Street’s profit estimates were too high for Adidas and other competitors like Vans owner VF Corp.
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and Under Armour
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On the company’s earnings call Thursday, Nike said it didn’t plan on getting sucked into a “race to the bottom on digital,” where weaker online traffic forced more markdowns. But like Kernan, Raymond James analyst Rick Patel also had questions about Nike’s efforts to push full-priced product.
“Nike noted that it intends to focus on full-price selling and doesn’t want to participate in aggressive discounting,” he said. “Also, it aims to manage inventories for key franchises more carefully going forward in order to avoid the promotional fray, which also limits sales growth. We view these as the right moves to protect the health of the brand, but also acknowledge that it leaves Nike at a near-term competitive disadvantage to drive revenue.”
CFRA analyst Zachary Warring, in emailed commentary, said some of Nike’s other rivals could cut into demand.
“Although Nike maintains a fortress balance sheet with significant capital returns, we believe the multiple will trend back down to pre-pandemic levels as the company faces competition from brands like Hoka and On [Holding] while it looks for new growth drivers and focuses on cutting costs,” Warring said.
Nike executives on Thursday said Jordan-branded clothing and products for golf, soccer and football, along with products for women and children, would bring stronger results. They said the same for bras, leggings, retro-themed running shoes and other offerings in its business geared toward women.
The company also announced plans to save up to $2 billion over the next three years. That savings effort, it said, could include simplifying its product selection, bringing more automation into its operations, and “streamlining” the company by shedding management layers.
Nike has reportedly already begun laying off workers. The company on Thursday said it expected to book pre-tax restructuring charges of around $400 million to $450 million “primarily associated with employee-severance costs.”
Nike plans to reinvest those savings back into the company. But as the company tries to fatten margins, Jefferies analyst Randal Konik said those reinvestments could do the opposite.
“We would expect [management] to reinvest a majority of these cost savings, likely leaving less margin and earnings ‘cushion’ should top-line performance continue to soften over the next 6-12 months,” he said.
In recent years, Nike has been trying to sell fewer items through outside retail chains and more through its own stores and online channels. But executives on Thursday said that multiyear effort had created “complexity and inefficiencies”
Edward Jones analyst Brian Yarbrough told MarketWatch that Nike is likely cutting costs after weighing the broader economic backdrop and weakness in its digital business against its sales and margin goals.
“Combined with a slower revenue-growth environment — and the fact that digital, which is their more profitable channel, is slowing and in some markets declining — I think they probably said, ‘If we’re going to get there, it’s probably going to have to come with some cost cuts,’” Yarbrough said.
