Few companies benefited more from government generosity during the pandemic than Nike Inc. Stuck at home and with nothing else to spend its trillions of dollars in stimulus money on, consumers couldn’t get enough of what the athletic-gear maker was selling. In 2020, the Air Jordan 1 Highs were going for a 61% premium on the resale market. Nike’s share price is set to rise 40% in 2020 and 25.5% in 2021, hitting a record high in November. Only four of the more than 30 Wall Street analysts covering Nike at the time recommended investors “hold” its shares, which is often interpreted as an encoded recommendation to sell.
Those heady days are long gone. Nike shares have fallen 37% from their peak. The number of analysts with ‘hold’ rating on the stock has tripled to 12. In its fiscal 2023 earnings report last week, the company disclosed that it had $8.5 billion of unsold inventory, a level despite margin-busting promotions. That’s up about 23% from what it described as healthy inventory levels in 2021. Its outlook for sales in fiscal 2024 came in below analysts’ estimates. Those Air Jordan 1 High? They are now selling at a 2% discount on the resale market. This raises an uncomfortable question: Is the $152 billion global ‘sneaker bubble’ bursting? The answer, at least for Nike, may be ‘yes’.
“Overall, Nike is a solid brand, and it is not suffering from an existential crisis,” Neil Saunders, an analyst at GlobalData Retail, said in a note to clients. “However, it is also not on the front foot, and it has to be accepted that the year ahead will be one of re-establishment, retrenchment and reform of the way it does business.”
A weak point for Nike is its symbiotic relationship with the resale market for sneakers, in which resellers quickly snatch up inventory. This created a shortage for the company’s footwear, allowing it to sell the shoes it had in stock at a huge premium. In some ways, it’s not that dissimilar to the concert ticket industry.
But with supply chains normalizing and inflation rising over the past two years, there are signs that consumers are becoming more discriminating in spending. Expensive sneakers are pretty low on the list of priorities.
The other issue for Nike is that it’s in an innovation slump, having not released a single hit sneaker since it introduced the Nike React in 2019. At the same time, independent sneaker brands have proliferated and luxury apparel companies have entered the footwear business. The aesthetically appealing Hoka sneakers, which Deckers Outdoors bought for $1.1 million in 2012, now bring in nearly $1.4 billion in annual revenue. While Nike is known for style, Hoka is designed for comfort and performance, and has become a mainstay among marathoners, casual runners, and fans of casual shoes. Last year, Hoka surpassed Nike, Adidas, New Balance and Converse as the No. 2 best-selling sneaker brand on StockX. French sportswear company Salomon has the best-selling shoe on the resale site.
Nike’s track record with female athletes is also putting it at a disadvantage in capitalizing on the growing $63 billion athleisure market in the US. Nike suffered a tarnished reputation among women following investigations into the company’s corporate culture and its treatment of pregnant athletes. Many star female athletes, such as Olympic gymnast Simone Biles and WNBA player Breanna Stewart, have not renewed their contracts with Nike, choosing companies such as Gap Inc.’s Athleta, Puma SE and Lululemon Athletica, where the merchandise they sell But there is more creative input.
With sneaker sales slowing, Nike’s relatively small ability to connect with female buyers is a risk. If it wants to survive in the changing sportswear landscape, it will need to expand its roster of female athletes and add new signature apparel and footwear designed with them in mind.
The good thing for Nike is that it appears to be recognizing its shortcomings. The company announced a number of executive changes last month in an effort to “deliver breakthrough innovation” that can bring the creativity and innovation the brand needs. And just last week, it announced a new women-focused initiative called the Nike Well Collective, which includes 1,000 new fitness instructors focused on holistic fitness and a range of new trainings and exercises in its apps. Later this summer, it will launch a signature shoe called the Nike Sabrina 1 with New York Liberty All-Star Sabrina Ionescu.
In sports, there is no greater story than a comeback – like the triumphant return of an aging superstar. It’s probably too early to compare Nike to an aging superstar, but it’s important for the company to convince customers and investors that it can recapture its glory days. ©Bloomberg
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Updated: July 04, 2023, 09:24 PM IST