Nike Inc (NYSE:NKE) reported its fiscal first quarter results this week, topping earnings estimates but falling short on revenue, along with withdrawing guidance and postponing its investor day that was scheduled for November. The sneaker giant is in for a CEO change on October 14th.
Fiscal First Quarter Higlights
For the quarter that ended on August 31st, Nike reported revenue dropped about 10% YoY to $11.59 billion, which was short of LSEG’s estimate of $11.65 billion. More precisely, direct to consumer sales shrinked 13% to $4.7 billion, and digital sales recorded an even sharper drop of 15%. Wholesale revenue also recorded a drop of 8% as it amounted to $6.4 billion.
In North America alone, Nike footwear sales dropped 14%, followed by a 10% drop in apparel sales. Converse also continues to drag Nike’s result down with sales decreasing 15% to $501 million, but still topping StreetAccount’s estimate of $493 million.
On the other hand, Nike earned a net income of $1.05 billion, or 70 cents per share, topping LSEG’s estimate of 52 cents. Gross margin grew by 1.2 percentage points to 45.4%, topping StreetAccount’s estimate of 44.4%, but profits still dropped by almost 28%.
A change in direction or more precisely, going back to what made Nike into a powerhouse.
The revenue shortfall is owed to Nike fixing its product assortment and reworking its approach to innovation, which in a way built its brand from the ground up. The sneaker giant has admitted its mistake of focusing on direct sales channels like its website and stores and leaving its wholesalers like Foot Locker Inc (NYSE:FL). Foot Locker has been working hard to improve the customer experience and refresh its stores and its latest quarterly results showed these efforts are bearing fruit. But despite reporting first comparable sales growth in six months, Foot Locker still recorded a loss of $12 million. Foot Locker continues its turnaround efforts as it tries to stay relevant in an environment where brands like Nike are not as reliant on multi-brand retailers as they were in the past, but fortunately for Foot Locker, even Nike realized it cannot do it alone. With its latest quarter that ended on August 3rd, Foot Locker did show things are looking up as it restores its relationship with Nike, its biggest brand partner, with gross margin expanding for the first time in more than two years.
While Nike’s DTC switch led to an initial boost in both sales and profits during the Covid-19 pandemic, it wasn’t a good call for the post-Covid era when shoppers returned to physical stores. More importantly, by getting into the complexity of direct selling, Nike lost focus of its strength, innovation. Although the departing CEO, John Donahoe succeeded to grow annual sales by more than 31%, this growth came at a cost of churning out legacy franchises, not the groundbreaking styles that Nike build its global legacy on. The result after a short-term sales boost was that those franchises reported double digits drops which is also expected for fiscal 2025. Moreover, overall online sales for fiscal 2025 are expected to also drop in double-digits. The returning Nike veteran, Elliott Hill, is the right person to mend wholesale relationship and bring Nike back to its roots. Undoubtedly, recovery will take time and a stagnant sneaker market, along with an environment of cautious consumer spending will make it even harder for Hill to turn things around.
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