5 Takeaways from Nike’s Earnings

It could’ve been worse for Nike.

On Thursday, the world’s biggest sneaker seller reported sales of $12.4 billion for the quarter through November, a decline of 8 percent compared to the same period last year. But that performance was still better than the 9 percent drop analysts had expected.

Nike’s gross margins also fell 100 basis points to 43.6 percent as the company leaned heavily into discounting to keep its sneakers selling, again beating an even more dismal forecast from analysts. Nike’s stock initially jumped 10 percent in after-hours trading before the gains evaporated.

Nike knew the quarter would be tough. The company is in the midst of trying to enact a major turnaround that touches on numerous parts of its business, from its products to marketing to distribution. A number of its missteps were years in the making, such as becoming overly dependent on — and overdistributing — a small number of key franchises that have now cooled off, and placing too much emphasis on direct sales, weakening its wholesale business while creating openings for competitors on the shelves of Nike’s long-time retail partners. The situation led to falling sales and the departure of chief executive John Donahoe in September.

Nike’s new CEO, Elliott Hill, a company veteran who came out of retirement to assume the role, now faces the daunting challenge of steering Nike back on course.

On a call with investors, Hill spoke about the state of Nike’s business and outlined his immediate priorities.

“I recognize that some of these actions will have a negative impact on our near-term results, but we’re taking a long-term view here,” he said.

Here are five takeaways from the quarter and Hill’s statements.

Sport Back at the Centre

In his first 60 days on the job, Hill spoke to Nike staffers, went on the road to visit Nike stores in cities from Los Angeles to Beijing and talked to different Nike partners. One of his first conclusions about where Nike went wrong: “We lost our obsession with sport,” he told analysts and investors on the call.

Hill said Nike will put sport and athletes back at the centre of everything it does, a mission similar to that Adidas undertook as part of its recent comeback. That focus will be reflected in how Nike operates internally. Under Donahoe, the company had shifted its structure to be organised around three consumer segments: men’s, women’s and kids. Moving forward, Hill said teams will be aligned around different sports — what he called “fields of play” — such as running, training, basketball, football (i.e. soccer) and sportswear, with further segmentation from there into men’s, women’s and kid’s.

The company also recently increased its investment in sports marketing by resigning deals with professional leagues and teams, such as the NBA and WNBA, the Brazilian Football Confederation and the NFL.

Not least of all, Nike plans to leverage its extensive roster of athletes in its marketing and will work to deliver products that serve athletes.

No Pain, No Gain

Nike recognises that it became too dependent on a handful of retro styles, notably Air Force 1, Jordan 1 and Dunks. While it has already begun pulling back on those models, that work is far from done. Hill and CFO Matthew Friend both emphasised that Nike will continue reducing the availability of those models.

That work, they acknowledged, will result in short-term pain for Nike. Those shoes have been big volume drivers for Nike over the past few years, and easing up on them will mean more declines to Nike’s top-line sales. Because Nike is also resorting to discounting to keep them moving so it can clean up the marketplace, they’re also hitting its margins and profitability. (Nike’s net income for the quarter was $1.2 billion, down 26 percent versus the same time last year.)

Hill said these moves will be necessary, both for Nike’s long-term brand health and to create shelf space for the new products Nike plans to release in quarters to come.

Boosting Full-Price Sales

Those franchises aren’t the only products Nike has put on sale. Hill said that approximately half the products in Nike’s own channels were marked down entering the year. The discounts have been notable through the holiday season as well, with the Wall Street Journal reporting that it’s created challenges for Nike retailers trying to sell the same items.

Hill expects to change that situation. Once Nike has cleared out old inventory — a situation he and Friend admitted will take a few quarters — the aim is to have a much higher share of full-price sales, especially through Nike’s own channels.

Rebalancing the Marketplace

On that point, Hill said Nike is rethinking the way it approaches direct sales versus wholesale. Under Donahoe, Nike greatly accelerated its push to do more sales through its own channels, but the strategy backfired as customers didn’t necessarily follow Nike after it left retailers. Nike also angered important partners, who felt Nike had turned its back on them.

Hill has been working to reestablish trust and talked about his vision for how Nike will balance direct sales and wholesale. Nike plans to make its own channels more premium destinations where shoppers will find Nike’s pinnacle products and discounting will be kept to a minimum. With its retail partners, Nike will work to establish closer relationships that Hill described as being more supportive through actions such as offering them access to better Nike inventory and providing more education on its innovations.

“We’ll do more than just sell-in our products,” he said. “We’ll actively support mutually profitable sell-through.”

Nike will also empower its local teams in key cities and countries to take actions that they feel better serve the customers in their markets. In China, for instance, where Nike has struggled lately, the company has a sport research lab that Hill said analyses differences in traits like gait and foot form to better create products for that shopper.

Rebuilding the Nike Brand

Nike’s reputation was built on its marketing as much as its products, but it’s another area where Hill and others believe Nike had lost its way. The company increased its investments in performance marketing geared toward driving traffic to its digital channels, for example, but in doing so it neglected the sort of brand building that made it a global name.

Nike will reduce its spending on performance marketing and redirect those resources to sports and brand marketing. Hill’s goal is for Nike’s marketing to create emotional impact, not just generate clicks, and athletes, as Hill sees it, will be the key to creating that impact.

“This isn’t going to be easy,” Hill said of the job ahead, “but we’re ready for the challenge.”