For nearly two years, we’ve been writing about the challenges to the athleisure and athletic footwear category (including our recent discussion about the stall in the yoga/athleisure apparel category at the start of 2024). Unfortunately for Nike, they are in both footwear and athleisure--meaning that growth and market share have become more difficult to deliver (which is what Nike’s organizational and prioritization changes also imply). On top of this, Nike’s lifestyle business declined across men's, women's, and Jordan in its March-May 2024 quarter which has led management to conclude they need to reposition that business away from e-commerce channels and shrink it overall. This repositioning is similar to adidas last year, suggesting that the decision is more macro related. The net-net of these is that Nike expects the next twelve months to be a period of lower revenue (down mid-single-digits) and earnings.
On the reprioritization and reorganization, Nike CEO John Donahoe said:
"We're sharpening our focus on sport, accelerating our pace and scaling of newness and innovation, driving bigger, bolder storytelling, and elevating the entire marketplace to fuel brand distinction and being the path of the consumer. This is our playbook, and we're seeing momentum build in all four areas, particularly on the performance side of our product portfolio. We have work to do, but we're on it. Our teams are moving with energy and urgency against the opportunity we see in front of us. Now as we've discussed over the past few quarters, we've been accelerating our innovation pipeline, including pulling forward several innovations, some more than a year. We're moving aggressively to reestablish our innovation edge. We began with a focus on performance as Nike always does, and the early results from newness and innovation are encouraging. Performance grew double digits in the quarter, with growth in many of our key sports. And as we kicked off our multiyear innovation cycle, one of our key priorities has been increasing our speed to the consumer. We believe accelerating the pace and consistency of our innovation will allow us to deliver impacted scale season after season. Now as you know, for years, Nike has had an Express Lane, which enables short lead time replenishment and hyperlocal design. And we'll continue to leverage Express Lane. But over the past year, we have also built a new way of working across the entire product creation process. We call this speed lane, and it's part of a broader company-wide effort to move faster and be more responsive to the consumer...Fitness represents one of the largest market share opportunities we see as a company, particularly for our female consumer. We've made intentional decisions to make meaningful investments in fitness, and these actions are paying off. Over the past quarter, we saw broad-based growth for fitness, led by double-digit growth in apparel. For example, statement leggings, which is a key focus for us, were up high double digits in Q4, led by innovations we've introduced over the past few quarters with Universa, Zenvy, and Go. Women's fitness footwear also had a strong quarter, driven by Motiva and the latest version of Free Metcon, which came out last summer…”
Three takeaways:
- Donahoe also noted, “It's an intangible thing, but I think it's just so important, which is the heart and hustle of our team, which has just been extraordinary over the last year but also in the last 90 days, just accelerating...[The] teamwork of how [our teams are] working together end-to-end, the focus on the consumer, the increasing speed, pulling things forward...there's a palpable shift in the confidence and forward-looking nature of our teams.” (This is working together, in the office, something that we highlighted in our Lululemon story.)
- In regard to shrinking its lifestyle business, Nike CFO Matt Friend said “One of the ways that we maintain the health of those is by reducing what we're offering to consumers through our digital channel.” That comment aligns with what we’ve been writing about for a long time, that post-pandemic and going forward, most brands will find their growth in the brick & mortar channel through impeccable merchandise storytelling, attractive products at a good value, and diligent servicing. This compares to e-commerce, which has a law-of-large numbers dynamic, high customer acquisition costs, and too much advantaged competition (including Walmart.com, Amazon, Shein, and others).
- We believe that Nike’s softer-than-expected outlook reflects industry-specific dynamics and does not reflect deterioration in consumer spending and the economy, with the one caveat being that consumers are becoming more discerning. They are absolutely seeking out value and lower price points, which was the takeaway from our first-half 2024 summary and second-half consumer outlook.
