The sporting goods maker’s shares fell as much as 18% on Friday after the company said it expects a mid-single-digit decline in sales for the current fiscal year that began this month, instead of the more modest 2% growth Wall Street had expected. The drop wiped $24 billion from the company’s market capitalization.
The paltry numbers, even worse than last quarter, will put pressure on Nike CEO John Donahoe as he seeks to revive the company’s culture of innovation — an ethos the company needs as nimbler rivals such as Deckers’ Hoka, On Running, Alo, Vuori and New Balance chip away at Nike’s market share in key running and apparel categories.
Donahoe said he was looking for a company to help him with eBay and [hotlink]Service Now,[/hotlink] But never He became CEO of consumer goods maker Nike in 2020 after joining the company’s board of directors 10 years ago. This spring, he acknowledged that Nike’s pace of innovation was slowing, citing the rise of remote work as the cause.
In recent years, Nike has shifted its focus from cutting-edge footwear for serious athletes to lifestyle clothing and shoes, and Nike executives blamed part of the slowdown in the most recent quarter on lifestyle brands like the Air Force 1 and Dunk. The Wall Street Journal Earlier this year, the CEO acknowledged that Nike had lost its “edge” in sports and needed to rebuild its “disruptive innovation pipeline.”
The strategic shift has created more room for new brands to enter the market, and for established brands like Brooks, Hoka and New Balance to target the serious runner’s market. Last year, New Balance’s revenue grew 23 percent, while Hoka’s sales increased 14 percent.
Nike “needs to accelerate its innovation cycle and become a more agile organization to bring relevant performance and lifestyle innovation to the market,” TD Cowen analyst John Kernan wrote in a research note on Friday. Nike has also been criticized for relying too much on reinventing old models and not creating new products as quickly as it once did.
Many of Nike’s recent problems stem from self-destructive mistakes made by Donahoe. In addition to placing too much emphasis on lifestyle products at the expense of performance-oriented goods, the CEO made the huge strategic error of divesting from a third of its retail partners in recent years, selling less merchandise to chains like Foot Locker, Macy’s and DSW, and betting that it could sell more efficiently and profitably through its own stores and website. The online boom during the pandemic likely led Donahoe to mistakenly believe that e-commerce would almost permanently replace its retail partners, but that didn’t work out, and Nike has since shifted some of its focus back to retail.
Donahoe was originally hired to turn Nike into a tech company with e-commerce and apps at the heart of its strategy. But ultimately, Nike can only succeed by creating products that push the boundaries, and that won’t happen quickly. “A comeback at this scale will take time,” Chief Financial Officer Matthew Friend warned investors on a conference call with analysts on Thursday.
So reviving the culture of innovation that has been its secret sauce for decades at a stagnant company reeling from layoffs will be Donahoe’s big challenge and top priority if he wants to halt market share loss.“The sportswear giant may be alienating its core customers with a lack of newness,” Bloomberg Intelligence analyst Poonam Goyal wrote in a research note.
If Donahoe fails to rekindle Nike’s culture of innovation, customers will continue to look elsewhere for their newness.
