Speaker A :
Elliot Hill was enjoying retirement until not too long ago. For 32 years, he'd worked his way up at Nike. And the company he'd left behind as a senior executive was a giant of the apparel industry.
In fact, back in Hill's day, Nike was the most valuable clothing brand in the world, a position it occupied for most of the 2010s.
Cast your minds back to the peak of Nike. This was the company with the biggest endorsements, the most memorable ads, the sneakers that sold out in seconds, and running technology that was banned in races. They were influential, rich, and cool.
So imagine Hill's surprise when he was asked back not too long ago to take over the company as CEO.
Because Nike is in danger.
Their revenues have been shrinking quarter on quarter and, more dramatically, their market capitalization is down 80% from five years ago.
Elliot has leapt to action. He promised to turn the company around, did the rounds of all the business papers, and promised change.
But despite all that, just last week the S&P 100 announced that they were removing Nike from their index because of its lacklustre market cap.
Right now, the pressure is on. It's time to ask whether the clock is about to run out on Nike, or if they have a shot at regaining their dominant position in the sportswear world.
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First, let's give a little context on this recent news about the S&P 100.
For those who don't know, the S&P 100 and the S&P 500 are stock market indices. Essentially, they're neat lists of the top US companies which investors can pour their money into as a group.
When we say "top companies," we specifically mean the ones with the biggest market capitalization, which is the total value of their stocks.
Market cap is a reflection of what investors think of a company, its potential to grow, or its ability to return a healthy dividend.
In 2021, Nike reached its all-time high in market capitalization, at about $264 billion, or $179 a share.
Since then, over $200 billion of that has been wiped out, and their shares are now worth around $38 apiece.
Because of this, after 18 years in the big leagues, the S&P has downgraded Nike to a top 500 company instead of a top 100.
Now, to answer the question in everyone's mind: how did this happen?
How did Nike's stock fall by 80% in barely five years?
Well, there's a key moment to look at when Nike started down this destructive path.
It's July 25, 2020.
In an earnings call, the newly appointed CEO John Donahoe outlined his vision for Nike's wholesale partners.
"We envision having fewer of them," he said.
Behind a lot of corporate jargon, a plan was hatched in which Nike would start selling directly to consumers, winding down its relationships with companies like Amazon, Macy's, and Foot Locker.
It was a cutthroat move and could easily be seen as a clever one.
A dominant company decides to expand through the production food chain and keep more of the profits for itself.
A big part of this strategy involved selling more through their digital platforms like Nike.com and the SNKRS app.
But it just didn't work.
Looking at their results for the financial years ending in 2023 and 2026, we see revenue decline in all of those areas that they wanted to grow in.
Total revenue was down 9%, from $51 billion to $46 billion.
Direct customer revenue was down 17%, and their digital sales have been in continuous decline.
Funnily enough, even though they tried to move on from wholesalers, that was the only saving grace in their results this year.
Wholesale revenue was up 6% and exceeded their direct sales historically.
So let's look at the business strategy behind those numbers, because a few things happened which explain the lacklustre direct-to-consumer revenue.
Firstly, Nike focused too much on their iconic shoe designs: Jordans, Air Forces, and Dunks.
They threw more and more at their customers, doubling the number of Air Jordan 1 Highs on the SNKRS app between 2019 and 2023 and tripling the number of Dunk Lows in the same period.
Making their own shoes less scarce killed the hype around them, and so Nike started to discount them just to get them off the shelves.
That made the problem even worse.
At the same time, other popular sportswear companies were eating their lunch.
Brands like On and Hoka have built reputations as running-shoe specialists which deliver better performance results than your regular Nike running shoe.
So their revenues have soared while Nike's have tanked.
This is a market that suits specialist innovators.
On the lifestyle side, brands like New Balance have done a much better job at staying relevant with customers, with successful products and marketing campaigns that have contributed to double-digit revenue growth for the company five years running.
And finally, this story can't be told without mentioning China.
In recent years, China has become Nike's Achilles heel.
Nike relies on their iconic Swoosh to sell all of their products in China, while their competitor Anta sells products under a range of brands like Fila, Salomon, and Arc'teryx, which appeal to customers across the board.
And other companies are sharpening their knives, like Xtep.
Once upon a time, Xtep was just a knockoff sneaker brand, but they now have about 6,000 stores and are coming close to a billion dollars in revenue.
On the other hand, Nike's revenue in China is down 11% year on year.
So the TL;DR on Nike is this:
They cut off some of their best business partners, presumably nobody wants to buy Jordans, their running shoes aren't good enough, and they became complacent in China.
The final question to answer, then, is: can Nike turn this around?
Admittedly, this is where we start to get speculative, but it's a good time to remember why Nike became a sportswear giant in the first place.
They made revolutionary sports shoes, had iconic endorsements, and fantastic marketing.
That's what made Nike relevant in people's lives and made their shoes sell out in seconds.
Elliot Hill knows this, and he says he wants to put sports and product innovation at the center of their strategy.
Investors haven't been patient with him, but with the right products, Nike could definitely turn this ship around.
So back to the R&D lab it is.
While customers wait for game-changing products to pop up, we'll be waiting for their October financial results to see whether revenues can sink even further.
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Sam.
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