Why Nike Is Struggling ?

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Nike is the world's largest sportswear brand. This year, the company is on a mission to get its stride back. This week, the company posted its first earnings under new CEO Elliott Hill. Nike beat on the top and bottom lines, but its sales fell 8%. Analysts say it's the beginning of a long turnaround for the company after what should have been an Olympic gold-earning summer.

Nike shocked the market. Shares of Nike are in freefall after they missed on revenue last night and cut their full-year earnings guidance. The shares, down 20%, are on pace for their worst day ever. The plunge wiped out $28 billion of Nike's market cap. The stock is cut in half since the all-time high in November of 2021.

Competition seems to be eating their lunch, as analysts point out. The company blamed its performance on everything from macro challenges to remote employees. It turns out it's really hard to develop a boldly disruptive shoe on Zoom. Experts say this was part of a years-long series of strategic errors. When a $50 billion business sees a down 10% quarter, it’s not an overnight occurrence.

Meanwhile, net sales of emerging competitors Hoka and On Running have both increased over 30% in recent quarters. Even established rivals like Adidas and Asics have seen growth, while Nike has declined. Nike has fallen behind, and experts believe this illustrates the fact that the company has experienced a lull in innovation. Without growth, the kind of scale that Nike has achieved isn’t worth much.

Now, all eyes are on Nike’s new CEO, Elliott Hill, to turn the company around. Company veteran Elliott Hill is stepping out of retirement, much like Tom Brady, to take the helm. The big questions are: What happened, and can Nike's new CEO get the iconic sportswear giant back on track?

Since going public in 1980, Nike’s formula of marketing around elite athletes helped it become a global superpower. So, what makes Nike special? It’s the magic of the marketing. Much of retail success is storytelling, and Nike historically dominated storytelling. Nike’s storytelling created a strong connection with its audience, resulting in strong sales.

By 2016, Nike reported annual revenues of $32 billion. Nike co-founder and former chairman Phil Knight decided to shift the company’s focus toward digital growth before stepping down as chairman in 2016. In 2020, former Nike board member John Donahoe replaced Mark Parker as CEO. Donahoe, with a tech background as CEO of ServiceNow and eBay, seemed like the right leader to push Nike toward digital growth.

Under Donahoe, Nike moved towards a direct-to-consumer model (DTC) by focusing on sales directly through its own platforms and stores. Nike decided to prioritize DTC, a higher-margin business, keeping the best releases for themselves and pulling back from long-standing partners like Foot Locker. For a while, the plan seemed to work.

In September 2020, Nike reported digital sales growth of 82%, despite relatively flat revenue for the quarter compared to the previous year. The Covid-19 lockdowns contributed to the boom in Nike’s online sales, and the company was ahead of the game when it came to digital retail. Encouraged by the success, Nike cut ties with several wholesale partners, such as Dick’s Sporting Goods and Foot Locker, in favor of its DTC strategy.

However, research shows that DTC doesn’t always work as businesses hope. A 2024 study by BMO Capital Markets revealed that retailers selling directly to consumers didn’t see significant improvements in revenue or profit margins. While companies may expect to absorb middlemen profits, they often end up becoming middlemen themselves, absorbing operational costs without seeing the anticipated benefits.

Nike’s DTC strategy seemed like a success during the Covid era, but as lockdowns lifted and consumers sought in-store experiences, digital growth started stalling. Internally, Nike underwent layoffs and cost-cutting measures, claiming to shift resources towards high-growth areas. Analysts noted that Nike had over-rotated towards DTC, and when consumers returned to physical retail, Nike struggled with prioritization and placement in stores.

Nike also faced challenges in the running business. During Covid, a record number of athletes joined the sport, but Nike pulled back on developing its running category. This diminished its credibility in the running community, which had previously been a core strength. Additionally, Nike faced slowing consumer spending in China, flatlining growth in North America, and strong competition from Adidas and innovative smaller brands like On and Hoka.

The excess inventory from slowed sales further damaged Nike’s reputation. Consumers perceived Nike as “cheapened” due to the abundance of product. The company appeared to lose its “cool” factor, reminiscent of a club with no line outside. Experts argue that Nike, in its effort to become a tech company, lost sight of its core strengths: innovation and storytelling.

By early 2024, Nike began returning to wholesale partnerships. Foot Locker’s relationship with Nike improved as Nike acknowledged over-rotating away from wholesale. Nike invested heavily in retail partnerships, recognizing that physical retail remained crucial.

In September 2024, the company announced Elliott Hill as the new CEO, replacing Donahoe. Hill, a 32-year Nike veteran who started as an intern, is expected to address Nike’s innovation issues and reignite its core strengths. In a recent earnings call, Hill emphasized clearing out excess inventory, reinvesting in sports marketing, and returning to an athlete-focused approach.

Hill stated, “We lost our obsession with sports. Moving forward, we will lead with sports and put the athlete at the center of every decision.” Experts believe the turnaround will take at least 18 months, requiring a renewed focus on product innovation and storytelling to remind consumers why Nike is special.

Hill is likely reviewing Nike’s innovation pipeline and reinvigorating the product development process. Nike’s strength lies in its unmatched research and development and marketing budgets. As one expert put it, “Winning is winning.”