The world’s largest sportswear company lost out to its rivals because it prioritized sales in its own stores and website, didn’t offer enough new products, and instead relied on classic styles.
Hill warned that his efforts would be painful in the short term, with sales and profit margins expected to be significantly lower this fiscal quarter than in the previous three months.
But he stopped short of eliminating all the bad news early, for example by discontinuing out-of-fashion sneakers or lowering sales and profit forecasts for the next few years.
This looks like a missed opportunity and means the threat of a reset continues as Nike embarks on the difficult task of winning again.
It has long been clear what Nike should do. And Hill devised a plan to do just that.
The company will be obsessed with sports again. Mr. Hill plans to organize Nike into “fields” centered around basketball, football and soccer, with men’s and women’s products separated into common divisions. It is expected to unleash a wave of innovative new products.
He is right to focus on newness. Nike needs to release innovative sports products that can drive broader trends. After all, performance is Nike’s cornerstone, but the company and rival Adidas are also like fashion brands and need a pipeline of fresh items.
Hill plans to ramp up marketing efforts to tell Nike’s story as a brand, aiming to bring back the great campaigns that Nike has traditionally been known for.
He intends to give more powers to city and county teams to reconnect with local athletes. Nike, for example, has focused less on neighborhood running clubs, giving opportunities to rivals like Deckers Outdoor’s Hoka.
The new CEO is also trying to rebuild relationships with retailers that Nike abandoned under his predecessor, John Donahoe. Nike sought to imitate luxury brands by controlling the distribution of most of its products through its own stores and digital channels.
As part of the shift, Hill plans to cut discounts on Nike’s website, where promotions accounted for half of sales. Instead, he plans to transform Nike’s own channel into a premium destination that elevates the brand and carries the widest selection of products.
It’s part of a broader effort to use Nike’s outlet stores to clear out excess inventory, get rid of obsolete inventory and make room for popular new products. The latter will be more carefully managed to make Nike sneakers attractive again.
His blueprint is wise, but it will be painful.
As a result, Nike will see a low-double-digit sales decline in the third quarter, worse than the 8% contraction in the three months ended Nov. 30, as it disposes of outdated footwear inventory. I warned you that it would be.
This exercise is expected to reduce gross profit margin, which is the difference between the price a retailer buys and sells a product, by 3 to 3.5 percentage points. No wonder the stock price fell nearly 4% in pre-market trading.
But once again, Nike stopped short of providing long-term guidance. That could happen when Mr. Hill unveils the complete blueprint at next year’s investor day.
The company’s earnings release last week should have been a good opportunity to clear things up. Inventory was flat at the end of the third quarter, but it might have been wise to claim all the old Nike Dunks and Air Jordans you needed to sell.
It would also have been a good time to reset more realistic long-term sales and profit expectations and reflect on how difficult it is to change the direction of Nike’s corporate giant.
This is something Hill’s counterpart at Adidas, Bjorn Gulden, did shortly after taking over as CEO in early 2023.
Hill has little chance of making a definitive break with his past and building a solid foundation. He’s made some progress toward that goal, but it looks like he needs to make further progress.
It should not be left for too long. Nike’s recovery won’t be quick or easy, and the more time passes, the more Hill’s problem will become, not his predecessor’s.
Nike needs to release a second shoe, and fast. ©Bloomberg
