Nike pivots its strategy, looks once again to outside retailers to drive sales

By Bill Peters

Stock drops toward a more-than five-month low, after profit beat expectations but gross margin missed and the outlook was cut

Amid faltering demand for shoes and clothing and slipping digital sales, Nike Inc. on Thursday said it will bank a lot more on the thing it has spent the past several years turning away from: other retailers.

Executives discussed those plans on Nike's (NKE) earnings call, as it tries to cut staff and costs, refocus on sports and flood the zone with newer products from its Air, Jordan and women's segments.

Nike's stock sank 6.1% in Friday's premarket, to put it on track to open at the lowest price seen since Oct. 3.

While the company reported late-Thursday fiscal third-quarter profit and revenue that topped expectations, it missed on gross margin and cut its margin guidance for the current quarter.

Chief Executive John Donahoe said during the call that Nike direct - the segment of Nike that sells things through its own stores and e-commerce platform - would still be important to the company.

But as more people return to shopping in physical stores, he said "We must lean in with our wholesale partners and elevate our brand and grow the total marketplace."

Chief Financial Officer Matt Friend on Thursday said that the company would invest more in seasonal marketing campaigns and the presentation of Nike gear in stores. The company would also spend to make its in-store assortments more varied and colorful.

"We don't like the way our brand is showing up in wholesale, and we own that," he said. "We need to focus on elevating the experience for consumers when they come into interaction with our brand."

Before the results, UBS analyst Jay Sole said a bigger shift toward other retailers, such as Foot Locker Inc. (FL), was possible, as Nike tries to hit Wall Street's sales targets amid a continued slowdown in sneaker demand and rivals' price-cutting efforts intended to lure shoppers.

Nike has been trying to build out its own stores and digital network over recent years and rely less on outside retailers to drive demand. In December, the company said efforts to expand that network "added complexity and inefficiencies" as competition increased.

Nike on Thursday stuck with its full-year forecast for sales growth of around 1%. For its fiscal 2025, which starts closer to the middle of this year, executives expect sales and profit to increase. But they said they expected sales in the first half of that year to be down by low single digits.

Ahead of the results, Sole, the UBS analyst, said he was "not expecting a big catalyst" from Nike's results.

"We also expect sentiment to stay near current levels," Sole said. "The market is looking for an inflection in Nike's sales growth trend, but probably won't get one."

As earnings ended up beating expectations, management said it was "encouraged" by the company's efforts to focus on newer products and deliver better growth.

The company reported fiscal third-quarter net income of $1.17 billion, or 77 cents a share, compared with $1.24 billion, or 79 cents a share, in the same quarter last year. Excluding restructuring charges, Nike earned 98 cents a share.

Revenue crept higher, to $12.43 billion from $12.39 billion a year ago. Nike's digital sales fell 3%.

Analysts polled by FactSet expected Nike to report adjusted earnings per share of 75 cents, on revenue of $12.28 billion.

But gross margin for the quarter expanded by 1.5 percentage points, missed the guidance provided in December for growth in the 1.6-to-1.8 percentage-point range.

And for the fourth quarter, the company cut its guidance for gross margin expansion to 1.6-to-1.8 percentage points from 2.25-to-2.50 percentage points.

Nike has faced questions about whether its "newness and innovation" - products it can also sell at a higher price - are resonating with customers.

Executives on Thursday said the Olympics in Paris this summer would help put Nike's newer offerings in the spotlight. They said they plan to roll out Air technology in new running sneakers, and in football and basketball shoes.

They also touted Nike's new "Dynamic Air" technology, which they said was more responsive to each individual footfall to deliver more comfort. They said Dynamic Air would be available across many of its sneakers, starting with the Air Max DN, which it called a lifestyle franchise that will hit thousands of stores globally next week.

"I've been wearing the DN all week," Donahoe said during the call. "And in fact, I'm wearing them right now. And it really is a unique and great sensation."

-Bill Peters

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03-22-24 0806ET

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