Nike’s Misstep: Can The Sporting Giant Bounce Back?

Nike is facing multiple hurdles and challenges. As inflation hurts and new brands spring-up, consumers are opting for the cheaper alternatives, leaving Nike’s premium offerings struggling to keep up.

Without its wholesale partners, Nike has reduced avenues for sales and diminished its ability to mitigate risks. In a desperate bid to reverse course, the company is now trying to rekindle relationships with retailers, as per some reports. However, this is easier said than done.

Wholesalers, who once proudly displayed Nike products, are now hesitant to make room for the swoosh, with rising competition from fast-growing brands, like On and Hoka, eating into Nike’s shelf space.

Adding to Nike's woes, the company reported a drop in revenue for its fourth quarter, ending May 31, 2024. Total revenue fell to $12.61 billion, down from $12.83 billion in the same period last year. This marks the fourth year-over-year decline in quarterly revenue since Q1 of fiscal 2019.

Notably, three of these drops occurred in Q4, with the first decline happening during the onset of the COVID-19 pandemic in 2020. Although Q4 2021 showed a brief rebound, outperforming the previous two years, the recent dip highlights the growing challenges Nike faces in the current retail landscape.

Nike’s fourth-quarter results also revealed a decline in gross margins, which dropped by 1.4 percentage points to 43.6%, narrowly beating analysts' expectations of 43.5%. This margin compression was driven by higher product input costs, increased freight and logistics expenses, and aggressive promotions to clear excess inventory.

Additionally, unfavourable currency exchange rates added to the pressure. While these challenges weighed on earnings, Nike remains optimistic, projecting "above average margin improvement" for fiscal 2024.

Inventory levels have been a persistent problem for Nike, with the company holding $8.5 billion in stock at the end of Q4, flat year-over-year but still 23% above pre-pandemic levels in 2021.

Retail analyst Neil Saunders from GlobalData pointed out that Nike had over-ordered stock, failing to quickly adapt to slower consumer demand in a challenging economic environment. Despite this, Nike believes it’s in a “healthy” inventory position, having offloaded $400 million in stock quarter-over-quarter, and expects further improvements.

Citi highlights a concerning profit warning from Topsports, Nike’s key wholesale partner in China, with operating profits expected to fall 35% year-over-year due to weakening consumer demand and elevated inventory levels.

The broadening of discounts and promotions is negatively impacting Nike’s gross margins in the region. While Nike’s fiscal 2024 guidance already anticipated lower sales in China, Citi is increasingly worried about the impact of heightened promotions and inventory on Nike’s Q1 FY25 performance.