Nike delivered some coal to investors’ stockings in the second quarter 2024. The quarter ended November 30, so it includes a good chunk of holiday sales.

Revenues advanced a mere 1% to $13.4 billion, and the company warned third-quarter revenues would be down slightly, suggesting it doesn’t expect a robust late-season holiday surge either.

Given greater visibility from wholesale orders and tepid consumer demand, the company expects the fiscal year 2024 to advance only 1% from last year, a pullback from its mid-single-digit growth guidance in the first quarter. And its current projection assumes the numerous global headwinds it foresees don’t blow stronger as 2024 rolls along.

On a positive note, profits advanced 19% to $1.6 billion, but to keep that up, it also announced plans to cut costs by up to $2 billion over the next three years. Immediately, it will reduce staff, though no numbers were given, and it will book associated pre-tax restructuring charges between $400 to $450 million in the third quarter, primarily attributed to employee severance costs.

As the world’s number one most valuable apparel brand according to Brand Finance, what’s happening with Nike has implications for the rest of the fashion sector, not just athletic footwear and sports apparel. Rounding out the top ten apparel brands listed in order are Louis Vuitton, Chanel, Gucci, Adidas, Hermès, Dior, Cartier, Zara and Rolex.

Net/Net: 2024 will be a tough year, and companies must get their houses in order.

Troubles Brewing Across The Globe

Pulling the company’s performance down was a 4% decline in North America sales, which accounted for 44% of Nike Brand sales and totaled $5.6 billion in the second quarter. Footwear dropped by 5% to $3.8 billion and apparel by 1% to $1.7 billion; only Nike equipment, a mini-segment with $200 million in sales, showed a gain in North America.

Europe, Middle East and Africa (EMEA) squeaked ahead by 2% to $3.6 billion in sales, but apparel there dropped by 6% to $1.2 billion. China with $1.9 billion in sales was up 4%, and Asia-Pacific and Latin America (APLA) was a bright spot, advancing 13% to $1.8 billion.  

Yet CFO Matt Friend warned, “We are seeing indications of more cautious consumer behavior around the world in an uneven macro environment. Total retail sales across the marketplace fell short of our expectations, with softer demand outside of key consumer moments,” which were noted as back-to-school and Thanksgiving weekend. That weekend, Nike Direct got a 10% bump in sales in North America, EMEA, and APLA.

Looking ahead, he sees mounting macro headwinds, particularly in China and the EMEA, based on softness in digital traffic and higher promotions in those markets.

As for turning the corner in North America, Friend was mute. Rather, he blamed a 30% North America comp increase in last year’s second quarter for weak performance this year.  

Converse is another company brand, which contributed $2.4 billion in revenues last year, one-fifth of the company’s total $51.2 billion in sales. Converse was off by 11% in the most recent quarter.

Investors were expecting a better early-holiday report and Nike stock tumbled 12% from its December high of $122.53 on the 21st to close the week at $108.04.    

Counting On Innovation

Being the fierce competitor Nike is, it is counting on innovation to propel it forward.

“In this competitive environment, we need to accelerate our pace of innovation, elevate our marketplace experiences, maximize the impact of our storytelling and increase our speed and responsiveness,” Friend said in the earnings call, after CEO John Donahoe took a victory lap around recent performances of its athletes wearing Nike.

“At Nike, we like to say we’re on the offense, always. When we see something that needs solving, we don’t wait around. We solve it,” Donahue asserted as he called out Women’s, the Jordan Brand and Running as areas of outsized opportunity. Today, women represent about 40% of company customers and growth in the women’s category has averaged high-single digits over the past three years.

Yet while Donohue described the company as “getting back on our front foot accelerating the flow of our innovation and executing with excellence across our winning formula of innovative product plus distinctive storytelling plus differentiated marketplace experiences,” that wasn’t enough to turn the tide in the recent quarter.

He also said that the second half of fiscal 2024 will launch a multiyear product innovation cycle with new franchises and platforms, but he also warned: “This new innovation cycle will take some time to fully ramp up, given our size and scale.”

Tackling Size And Scale

World-class athletes must be disciplined to maintain their edge and perform at their finest; so too must world-class market leaders like Nike. Donohue suggested the company had grown fat and sluggish after advancing 10% last year to reach $51.2 billion last year.

With a promise to leverage the company’s scale to drive greater efficiency, the company will streamline its organizational structure and cut excess management layers.

Hundreds of employees will be getting the pink slip, according to The Guardian, and Oregon Live reported the cuts could outnumber a previous round in 2020, when the company eliminated 700 jobs.

CFO Friend said the company’s Consumer Direct Acceleration (CDA) strategy announced in 2017, which pulled back wholesale relationships in favor of direct-to-consumer sales, added complexity and inefficiency into its operations, suggesting that this will be an area to streamline through automation and technology.

Doubling Down On Messaging

In answer to a question by TD Cowen analyst John Kernan about the company’s SG&A expenses, which rose 1% overall, including a 1% uptick in demand creation expenses totaling $1.1 billion in the second quarter, Friend said the company will continue to invest in consumer-facing activities to elevate the brand’s stature in the market and “enable us to maximize the impact of the stories that we want to tell.”

Accelerated push marketing will support its direct-to-consumer business, but the costs for that traffic are high and getting higher. And the company may be ignoring the low-cost pull-marketing influence independent retailers have in the company’s core target market.

Damage Done

At the start of its CDA program, the company supported about 30,000 wholesale partners; that number was halved by early 2022. On the chopping block were Big 5 Sporting Goods, Urban Outfitters, Dillard’s, DSW and Zappos, plus scores of small independent running and sports shops.

Nike also discontinued selling apparel at Macy’s, which Macy’s CEO Jeff Gennette called “one of the most important brands for our customers,” though the Finish Line shop-in-shops at Macy’s continued to carry its sneakers. It has since resumed a relationship with Macy’s, as well as with DSW and Urban Outfitters.

While the company retained relationships with Foot LockerFL and Dick’s Sporting Goods, these retailers lost enthusiasm for the brand as their one-time trusted partner turned chief competitor. And the blow to smaller independent retailers was even harder to swallow.

GlobalData Retail’s Neil Saunders told Modern Retail, “It probably found that pulling back from retail channels has lost it some customers and given more prominence to rivals.”

Forget probably; the company took a blow to its reputation among the previously passionate retail supporters of the Nike brand. And it gave more innovative and intuned rivals a foothold into the businesses it abandoned.

“This inability to show love to subcultures, running in particular, has left a ton of cracks in their foundation, which are being filled beautifully by On, Hoka and other brands via specialty running stores,” Chris Burns of sneaker industry analysis firm ARCH told the Oregon Live. On and Hoku have revenues in excess of $1 billion each.

The 100-year-old Brooks Sports brand is another beneficiary of Nike’s wholesale misstep. The Berkshire Hathaway brand has quietly grown to $1.2 billion in revenues, according to Footwear News. CEO Jim Weber said, according to NPD data, it was the number-one running shoe in the U.S. in 2022.

“It’s great that Nike can claim a record-breaking marathon athlete, but that won’t have a lot of impact on the runner who frequents run specialty stores where Nike hasn’t been a leader in a long time in part because it’s less focused on performance than it once was,” shared Louis Sakany, OTR Global director of retail research, with Oregon Live.

As much as Nike leans on world-class athletes in its advertising and marketing to build its image, it’s given away leadership among retailers and their customers who used to depend on the brand.