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By almost all measures, the past year was an annus horribilis for Nike. The sportswear group’s sales fell at the second-fastest rate in its history. The 10 per cent drop the company reported for the fiscal year that ended in May was only surpassed by an 18 per cent drop in 1987. Earnings, meanwhile, almost halved year on year, one of the biggest falls since Nike went public in 1980.
As if that weren’t enough to make investors lace up their trainers and run for the hills, Nike did not offer full-year guidance for the current fiscal year. It did warn, however, that it expected to pay $1bn in additional costs for the current fiscal year as a result of US President Donald Trump’s tariffs on its important trading partners.
This looks a lot like an example of the kitchen-sinking effect. One of the advantages of taking over a company in crisis is the opportunity to reset sales and earnings expectations by dumping as much bad news on investors as possible. And Elliott Hill, the company veteran who returned from retirement last year to take the top job, has not only thrown out the kitchen sink, but the fridge and oven too.
Under Hill’s predecessor John Donahoe, the footwear group went too far in cutting relationships with big retailers in a bid to sell more directly to consumers. It also relied too much on the retro trainer trend for growth — pumping out endless reiterations of Air Jordans and Air Force 1s, while investment and innovation took a back seat. A brand that was once synonymous with athletic dominance and fronted by the biggest names in sports began ceding market shares to upstart brands such as Hoka and On.
Since taking the helm, Hill has increased efforts to clear out excess inventory and focused on mending relationships with Nike’s wholesale retailers. He has made investing in product development for sports athletes a priority once again. Plans to raise prices on some products and reallocate supply from China to other countries are expected to help mitigate the impact of Trump’s tariffs. Investors seem to have faith: the day after last week’s dismal earnings, the shares swooshed 15 per cent higher. They are now up almost 40 per cent from this year’s low, in April.
When it comes to audacious comebacks, Nike has form. Back in 1987, the company was beset by competition from companies such as Reebok, which had capitalised on the aerobics craze, and Adidas, which also targeted serious athletes. A year later, helped by a new “Just Do It” campaign and sales of Nike Air shoes, it reported a leap in sales, and grew at more than 30 per cent in each of the subsequent four years.
Can Hill, too, turn a crisis into an opportunity? Investors almost seem to expect it. Nike shares trade at roughly 40 times forecast earnings, according to LSEG, their highest level in more than three years. Fixing Nike won’t be easy or cheap, but getting the bad news out is a good first step.
