Over the past decade, Nike’s share price has managed a dismal compound annual growth rate (CAGR) of just 2%. Even if you include dividends, you get a disappointing outcome. It’s a cautionary tale for investors who assume that top brands are always good investments.
The CAGR doesn’t tell the full story. During the pandemic, Nike rose from sub-$70 in March 2020 to more than $170 by the end of 2021. There are many examples in the market of excellent returns over that period, fuelled by unprecedented levels of monetary stimulus. Nike is a standout example, as the returns were also driven by the market’s assumption that Nike’s direct-to-consumer strategy was going to transform the business.
Drunk on brand arrogance, Nike used the pandemic as an opportunity to throw other retailers to the wolves by pulling back on its wholesale business and focusing on online and Nike-owned stores. It disintermediated the likes of Foot Locker by starving them of stock and exciting new releases. It worked for a short while at least.
With the prospect of empty shelves and a worsening relationship with Nike, retailers cast the net wider and brought in new brands. As the tide went out on consumer spending, the outcome of Nike’s hubris became painfully visible. It had given competing brands an opportunity to win shelf space, something that is normally difficult to achieve. Though there will always be diehard fans of a specific brand who will buy everything directly, most consumers want a choice of brands and the benefits of omnichannel shopping through a wider footprint.
At the same time as causing chaos in distribution strategy, Nike took major brand risks. Instead of focusing on its core DNA (athletes and endorsements), it tapped into the zeitgeist of inclusivity above all else. In doing so, Nike started looking like every other apparel brand in its marketing, instead of sticking to its knitting as the brand of choice for the world’s sporting icons. If you try to appeal to everyone, you usually end up appealing to no-one.
These poor strategic choices took the share price back down to about $70 by the end of 2024 — yes, the same levels seen in the initial pandemic panic. Shareholders had been baying for blood and CEO John Donahoe was sent packing, replaced by Nike veteran Elliott Hill.
Hill needed to repair broken relationships with wholesalers and get Nike’s brand strategy back on track — literally, with athletes. Sadly, he also walked straight into the hornets’ nest of tariffs. The share price crashed to below $55 in April this year, a level last seen in 2017.
The market is giving Hill a chance, with the share price back above $70. On the latest earnings call, his prepared remarks included this excellent line: “Progress won’t be perfectly linear, but the direction is.” Or, put differently, the market should expect an uneven road on the recovery journey.
Progress won’t be perfectly linear, but the direction is
— Elliott Hill
Hill’s biggest focus since taking the reins has been to get Nike back to the thing that made it famous: sport. The group has been restructured based on specific sports, so there are people who work exclusively on football or basketball or tennis. The retail store designs are starting to follow the same approach. Unsurprisingly, one of the first places they’ve focused on is running shoes. If you’ve read Shoe Dog by Nike co-founder Phil Knight, you’ll know that this is the core DNA of the brand. It’s also where it lost out the most through its foolish pandemic strategy, allowing new running brands to win share. Nike Running grew by 20% in the latest quarter, so there are signs of a turnaround there.
The green shoots in the more performance-orientated products are encouraging, but the more generic apparel business is still in decline. The same is true for the Nike digital business that so much energy was put into, down 12% this quarter vs the stores down 1%. Wholesale grew 5%, so Nike’s efforts to repair those relationships are bearing fruit. Of course, this trend is negative for margin mix, particularly when you include the impact of tariffs. Gross margin fell by 320 basis points and EPS were hideous — a 30% year-on-year drop.
There is so much to be done, not least of all in re-establishing Nike Digital as a full-price channel rather than a discount model. One wonders just how much schadenfreude the likes of Foot Locker must have at the sight of Nike’s direct-to-consumer strategy backfiring completely in terms of margins. This turnaround is still in the “too hard” bucket for me, especially on an earnings multiple of 37.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.