Can innovation help Nike maintain its market dominance?

There was good news and bad news in Nike’s earnings announcement last week for its fourth fiscal quarter of 2024, which concluded on May 31.

The good news was that, regionally, Greater China remained its strongest growth area, with an increase in sales of 2.9 per cent for the quarter and 4.1 per cent for the year as a whole. (Excluding currency fluctuations, growth was actually about eight percent for the year.) Total sales for the year in China were US$7.5 billion, or 14.7 per cent of global sales compared with 14.2 per cent in the preceding year.

The bad news was that company CFO Mat Friend admitted that Nike fell short of its plan, telling investors on its June 27 conference call: “We experienced meaningful shifts in consumer traffic in key markets – particularly in Greater China, where brick-and-mortar traffic declined as much as double-digits versus prior year.” And, he added that “traffic softness [in China] persisted across all marketplace channels”.

Elsewhere, the Asia Pacific and Latin America region rose in prominence, increasing its contribution to total sales to more than 13 per cent for the year. In constrast, the Europe, Middle East and Africa region was pretty much flat and North America slightly down.

Full-year revenues for the company globally were US$51.4 billion in fiscal 2024, just a touch above last year’s US$51.2 billion.

In the fourth quarter, revenues were US$12.6 billion, down 2 per cent from the same quarter a year ago but flat when adjusted for currency fluctuations. Sales from its own platforms (Nike Digital and Nike-owned stores) were down 8 per cent, but wholesale revenues rose by 5 per cent (8 per cent currency neutral) and accounted for 56 per cent of the total. Converse, which makes up a relatively small component (4 per cent) of total revenues, saw sales dive sharply. A bright spot on the income statement though was gross margin, which strengthened by 110 basis points from a year ago.

The uptick in gross margin, accompanied by lower selling and administrative expenses, contributed to an increase in net income of 45 per cent to US$1.5 billion.

Accelerating the pipeline

The weakish result on the revenue front might have disappointed the market but it shouldn’t have come
as a big surprise. Friend, the company CFO had flagged the softer revenue outlook at the beginning of the year and said Nike was shifting its focus toward boosting gross margin and delivering cost savings, both programs on which the company has already embarked but not completed.

At the beginning of the year, the CFO had flagged as much as US$2 billion in cost savings over a three-year period, targeting simplification of the product assortment, increasing automation and use of technology, and organisational streamlining, including staff cuts. And CEO John Donohoe has insisted that the company wouldn’t give in on its pricing strategy in an increasingly promotional and competitive environment.

Nike’s leadership is hyper-aware of the importance of standing its ground on pricing and continuing to lead the field on technology and design. The top line was sure to cop some shorter-term volatility. This determination not to cave on its principles was once again emphasised by Donahoe on the company’s conference call: “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.” Note the word ‘reestablish’: clearly the company feels it has had its leadership position eroded in that area.

Donahoe claimed that new products in the basketball footwear and apparel segment of the business had already snatched two percentage points of the basketball market share in the US. In the road running segment, he said that recent releases in the existing Vomero, Invincible, Infinity, and Structure lines all grew in the “high double-digits over the quarter”, while the new Pegasus 41 has just hit the market.

China retail sales rise in promotional environment

China, as usual, remains a competitive battlefield for Nike with upstart local brands sneaking up on Nike’s market leadership and the subject of Friend’s doleful comment about a significant weakening in foot traffic. Still, China is a growth area when viewed over the long term, though currently highly promotional.

According to the China National Statistics Office, retail sales of all consumer goods through the first five months of the year have grown by 4.1 per cent, including 3.7 per cent in May on a year-on-year basis. Sales of softline items, such as clothing and footwear have been weak, with year-to-date sales up by only two percent according to the government numbers. Sporting goods were a standout though, rising by more than 20 per cent in May and 15.2 per cent for the year to date.

Other standouts were dry food (+9.3 per cent for May and same for the year to date), tobacco and liquor (+7.7 per cent and +11.0 per cent), telecommunications equipment (+16.6 per cent and +13.9 per cent), and household appliances (+12.9 per cent and +7.0 per cent). Note also that the numbers only include goods and not food catering, which has consistently outperformed sales of consumer goods. However, the gap is closing: while sales of goods in May grew by 3.6 per cent, sales for the catering industry increased by 5.0 per cent.

Company guidance: it will get a bit worse before it gets better

The softness in China is among the leading reasons that Nike expects its revenues in the next quarter to be down by 10 per cent. Weakness in other markets will also take their toll and the company will have fewer product launches. Elevated marketing costs around the Paris Olympics will also make their presence felt on the income statement, according to Friend.

Despite the reassurances of Nike’s top brass that the company was aggressively coming to grips with the competitive and macro challenges that were slowing its growth, the market was not convinced at all. Analysts’ questions on the conference call had a distinctly sceptical tone about them, indicating deep doubts about Nike’s ability to maintain its market dominance. Predictably, the stock got belted after the earnings announcement on June 27, falling by 23 per cent.

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