Despite surpassing Wall Street's expectations for third-quarter revenue and profits — largely thanks to holiday sales and price changes in North America — questions linger over Nike Inc (NYSE:NKE)'s future writes Stake market analyst Megan Stals.
The brand is losing ground in the US and other developed markets as contenders like Deckers-owned Hoka (DECK) and On Running (ONON) chip away at its dominance.
Meanwhile, growth in the Chinese market is sluggish as the country's economic slowdown fails to rebound as expected, impacting one of the company's most widely touted growth opportunities.
While Nike unveiled a US$2 billion cost-cutting initiative in December, many investors are still not confident in the company’s prospects and its share price is down almost 15% year-to-date.
So is this a chance to grab a quality stock at a discount, or is Nike’s dominance beginning to slip on a more permanent basis?
Rebuilding an innovation engine
A key concern is Nike’s ability to innovate. It hasn’t released a revolutionary sneaker since the carbon plate Vaporfly in 2017, leaving space for shoes like On Running’s Cloudflow 4 and Hoka’s Clifton 9 to steal market share.
This follows a strategic decision for Nike to focus heavily on fashion and retro sneakers, overlooking trends that favour performance running footwear and low-profile terrace styles like the Adidas (ETR:ADSGN) Samba.
Nike's reliance on past designs, at the expense of its sports-focused DNA, proved shortsighted as the company became overexposed to the short-term nature of fashion trends, enabling Hoka and On Running to fill the vacuum. Despite Nike’s original focus on the athletics track, its sporting prowess is more associated with its sponsorships in basketball and football.
Nike has realised its mistake and is now cutting back on 'classic' shoe supplies like the Air Force 1 to prioritise new launches.
While it makes sense over the long term, this marks a major departure from its strategy over the past few years when the Jordan brand and court-inspired styles, like the Air Force 1, drove sales.
That said, the upcoming Paris Olympics gives Nike a strong opportunity to regain momentum across its performance lines while leveraging airtime to push new products such as Air Max DN. Yet its success around this event isn’t guaranteed.
Fortifying retail distribution
Nike’s decision to wind back its wholesale partnerships in favour of a direct-to-consumer (DTC) approach failed to play out as expected.
To highlight the scale, investment notes show Nike had 30,000 wholesale partnerships before reducing this number sharply to 3,000 over four years. But the brand has arguably overestimated the pull of its brand power and the ripple effect that brick-and-mortar stores can have on purchasing decisions.
The company hoped to improve margins through direct sales and expected to continue attracting customers through its brand power but the decision opened the door for competing brands to increase visibility with customers.
These options are readily available in numerous shops, connecting with many new buyers and benefitting from the rise in amateur run clubs, ahead of record-breaking feats by elite runners.
Inventory issues have also weighed on the business. Factory closures in 2020 and 2021 led to supply disruptions and late deliveries in 2022 left Nike sitting on inventory.
Aggressive promotional efforts were necessary to clear stock and accommodate new products, but this also hit margins and temporarily devalued the brand.
The good news is that inventories are down 13% on last year and the company is expanding wholesale partnerships again, bringing about renewed opportunity to scale distribution through a larger retail presence.
Expanding into the future
Nike's growth hinges on its ability to expand its customer base but given its existing market share in developed markets, investors may be wondering what Nike’s long-term growth strategy may be.
China still presents an opportunity, as we saw with sales to wholesalers growing last quarter and further plans to expand its social commerce through Douyin — the local equivalent to TikTok.
Yet the country’s stalled recovery, geopolitical tensions and consumer interest in local brands means this is far from certain.
Looking at more developed markets, there could be room to grow its female customer base amongst women but competition is fierce with Lululemon becoming a powerhouse in recent years.
Despite challenges, Nike still has unrivalled brand recognition which means it should have the resources to get back on top. That said, it’s clear that a strong legacy is not enough anymore.
The planned strategic changes look like a step in the right direction but their success is not guaranteed and investors should be ready for volatility in the coming months.
Megan Stals is a markets analyst at Stake, with seven years of experience in the world of investing and a Master’s degree in Business and Economics from The University of Sydney Business School. Megan has extensive knowledge of the UK markets, working as an analyst at ARCH Emerging Markets - a UK investment advisory platform focused on private equity. Previously she also worked as an analyst at Australian robo advisor Stockspot, where she researched ASX-listed equities and helped construct the company's portfolios.