People wearing protective masks walk past a closed Nike store on Fifth Avenue during the COVID-19 outbreak in New York City on May 11, 2020.
Mike Seeger | Reuters
Nike CEO John Donahoe appears to be in a precarious position.
Former Chief Executive Officer EbayMcGirt, who has been at the helm of Nike since January 2020, is beginning to lose Wall Street’s trust after the company closed out a lackluster fiscal year with more bad news.
Nike warned on Thursday that its sales would fall by a staggering 10% this quarter, far more than the 3.2% fall forecast by LSEG, after posting its lowest annual sales growth in 14 years excluding the COVID-19 pandemic.
The company also said it now expects fiscal 2025 sales to decline in the mid-single digits, after previously expecting growth.
Nike’s shares fell 20% on Friday after the quarterly report. The company’s market capitalization was last estimated at about $114 billion.
At least six investment banks have downgraded Nike’s shares as Wall Street digests the bleak outlook for the world’s largest sportswear company. Morgan Stanley and Stifel He went a step further and specifically questioned the company’s management.
“FY25 guidance – the fifth downward revision in six quarters – pushes the outlook for a growth inflection point into 2025 (likely Q4 FY25 or spring at the earliest), asking investors to look ahead to an uncertain consumer discretionary backdrop through the second half of FY24 before reassuring investors of the success of an as yet unproven style and seeing momentum pick up in the second half of FY25,” Stifel analyst Jim Duffy wrote. “Management’s credibility has been significantly shaken, and potential CEO-level restructuring introduces further uncertainty.”
Nike’s stock price has underperformed the S&P 500 during CEO John Donahoe’s tenure.
Since Donahoe became Nike’s CEO, the company’s shares had fallen about 25% as of midday trading on Friday. S&P 500 And that XRT The retail-focused ETFs gained about 69% and 67%, respectively, during the same period.
Nike Chief Financial Officer Matt Friend said Thursday that the downgrade was due to a variety of factors, some of which were beyond Nike’s control, such as China’s economic slowdown and tough currency headwinds, but also problems of Nike’s own making under Donahoe’s leadership.
The company expects wholesale orders to be weaker as it expands with new styles, scales back staple franchises and works to repair relationships with key retail partners after cutting ties with them in favor of a direct sales strategy over the past few years.
At the same time, loyal shoppers on Nike’s website are no longer buying new versions of the company’s flagship Air Force 1s, Air Jordan 1s and Dunks. Critics say those sneakers have dominated the store’s lineup for so long that they have alienated customers who are now looking for fresh styles and innovative designs from a growing number of up-and-coming competitors.
That would put Nike back some of its most important customers: runners. As retailers focus on direct sales strategies at the expense of innovation, tenacious competitors like On Running and Hoka have stolen market share.
“At the end of the call, they were talking about running being a key sport that consumers are participating in, which was almost ridiculous. We’ve known that for a long time and we also knew that consumers were changing their minds and becoming much more active after the pandemic,” Jessica Ramirez, senior research analyst at Jane Harri & Associates, told CNBC, adding that Nike’s management change was “very necessary.”
“After lockdown, consumers were taking up running and taking it seriously, some even running every day, and Nike just didn’t respond well to that,” she said. “I think the company is at fault for its management missing a key consumer shift… Something changed and they missed the mark.”
Kevin McCarthy, senior research analyst at Neuberger Berman, told CNBC’s Scott Wapner on Thursday that the company needs a leadership change and that Donahoe’s employment contract could be ending soon.
“Everything that you’ve pointed out as issues with this company seems to stem from execution, management, all of that,” McCarthy said on CNBC’s “Closing Bell.”
“There are several very qualified internal candidates on the table right now. There are several ex-Nike employees who are also up for discussion. Other competitors are also up for discussion. But I think the assumption is that the company will have a leadership change over the next six months.”
To be fair, Donahoe was in the role less than two months before the coronavirus pandemic began in earnest in the US, and he had to contend with store closures, remote workers and rapidly changing consumer preferences and capabilities.
The company’s stock price may be falling, but Nike’s annual sales are expected to grow by about 37% under his leadership, from $37.4 billion in fiscal 2020 to $51.36 billion in fiscal 2024.
If you ask Phil Knight, Nike’s founder and chairman emeritus, Donahoe is doing just fine.
“I have seen Nike’s plans for the future and I believe in them wholeheartedly,” Donahoe, 86, said in a statement to CNBC. “I am optimistic about Nike’s future and have unwavering confidence and full support in John Donahoe.”
