Once upon a time, Nike was the brightest of the big players in the sporting goods market. For more than ten consecutive years, it has dominated the global sporting goods sales and revenue. Even Nike has developed the value of sports stars to the extreme, and the segment brand has become a myth created by Nike.
However, in the Chinese market, Nike suddenly found that it didn't seem to be able to make money.
On December 22, Nike's bleakest second-quarter earnings report in 14 years caused an uproar in the global market like a shock bomb. The company's share price responded by nearly 12%, and for a while, Wall Street investors expressed concern about its prospects.
According to the financial report, Nike's high-profile Converse Brand (Converse Brand) sales and wholesale earnings are weak, as if it has lost its former star on the fashion stage. What's even more shocking is that Nike's revenue growth has fallen to its lowest point since the financial crisis. This not only highlights the cruelty of market competition, but also reflects Nike's helplessness and predicament in the current market environment.
Nike management expressed deep concern about this situation at a meeting after the earnings release. They admit that with the volatility of the global economy and changes in consumer demand, Nike is facing unprecedented challenges. Management has even hinted that the company may encounter more headwinds in the upcoming second half of the fiscal year. This pessimistic expectation has undoubtedly cast a heavy shadow over Nike's future.
At the intersection of fashion and commerce, Nike has always led the trend with its unique brand charm and innovation. However, the dismal performance of this earnings report has made people see the fragility behind it. In the face of a highly competitive market environment and changing consumer demands, whether Nike can quickly adjust its strategy and regain its former glory has become the focus of everyone's attention.
Nike's plight is not an isolated case. In this era of rapid change, many once-glamorous brands are experiencing similar challenges. For them, how to find new growth points in the change and rekindle the enthusiasm of consumers will be a severe test.
The point is to see if the market will give Nike time now.
Sporting goods giant Nike recently released its financial results for the second quarter of fiscal year 2024, and the dismal data is staggering. During the reporting period, the company's revenue reached $13.4 billion, a year-on-year increase of only 1%.Net profit was US$1.6 billion, up 19% year-on-year. Compared with the 17% growth in the previous year, this report card is particularly bleak.
To make matters worse, it was Nike's worst second-quarter revenue growth since 2009. The attitude of the capital market has also taken a 180-degree turn, and investors have expressed concern about Nike's future.
From the perspective of brand segmentation, Nike's main brand's revenue in Q2 was only $12.9 billion, a negligible 1% year-on-year, almost standing still. And its Converse brand is even more bleak, with Q2 revenue of 51.9 billion US dollars, down 11% year-on-year, people can't help but sigh that the former glory has faded.
From the perspective of Nike's various sub-categories, footwear is still the mainstay of revenue, with Q2 revenue of 86US$0.7 billion, a year-on-year increase of 1%, accounting for 67% of the total revenue of the main brand. However, apparel revenue fell 1% to 37$7.4 billion, and 4The performance of $7.9 billion, a year-on-year increase of 17%, is not too bad, but it is difficult to hide the weakness of Nike's overall growth.
In terms of geographical distribution, the North American market has always been Nike's "treasury", but the Q2 financial report showed that the market's revenue fell by about 4% year-on-year to 56$2.5 billion, a staggering amount of money. This performance has undoubtedly cast a shadow over Nike's prospects. In contrast, revenue in other regional markets, such as Europe, Middle East and Africa, increased 2% year-over-year to 35$6.7 billion;Asia Pacific and Latin America revenue increased 13% year-over-year to 180.5 billion US dollars;Greater China has achieved five consecutive quarters of growth, with Q2 revenue up 8% year-on-year to 18$6.3 billion.
The problem is that even in Greater China, which appears to be strong, Nike's growth is slowing. In the face of an increasingly competitive market environment and the diversification of consumer demand, it is still uncertain whether Nike will be able to regain its growth momentum. The continued decline of the Converse brand has raised questions about Nike's diversification strategy.
Nike Greater China was once regarded as the brand's "growth engine", but recent data shows that its revenue growth has shown a slowdown trend. In the third and fourth quarters of fiscal 2023, Nike's revenue in Greater China was 19900 million dollars and 18$100 million, a year-on-year growth rate that plummeted from 25% to 1%. Heading into fiscal year 2024, revenue for the first quarter and second quarter was 17., respectively$3.5 billion and 18US$6.3 billion, the year-on-year growth rate continued to decline to 12% and 8%.
This trend not only raises concerns about Nike's future prospects, but also reveals a larger phenomenon in the domestic sports footwear and apparel market: for international brands such as Nike and Adidas, the shift in consumer preferences in the domestic market, the rise of local brands and the increase in market saturation are squeezing the growth space of these international giants.
To add insult to injury, domestic consumers' willingness to buy luxury goods is weakening in the second half of the fiscal year. Over the past few years, China's luxury market has been growing at an astonishing rate, becoming an important driver of the global luxury industry. However, recent indications suggest that this growth momentum may be slowing, which is undoubtedly a huge challenge for global luxury brands that rely on the Chinese market.
Nike, as one of them, undoubtedly felt this cold snap. The once-glorious Greater China region is now facing a double whammy of growth woes and a cold reception from the market. At this critical juncture, how Nike responds to this challenge and regains the favor of consumers will be an important test for its future development.
Nike revealed in its latest earnings report that as consumers gradually return to offline shopping, offline sales in Greater China have achieved impressive double-digit growth, injecting new vitality into the brand's continued growth in the Chinese market. This performance undoubtedly provided a valuable respite for Nike, especially against the backdrop of general weakness in global markets.
To further enhance the offline shopping experience for consumers, Nike is accelerating its "Connected Membership Solution" and has built a massive membership system with more than 500 partner stores in more than 130 cities. This initiative aims to create more growth opportunities for brands by enhancing engagement and stickiness with consumers.
Compared with the performance of Greater China, Nike's weakness in the global market is also emerging. Matthew Friend, Nike's executive vice president and chief financial officer, said in the earnings report that the company's second-quarter financial performance was a turning point in driving profit growth. "Looking ahead, we expect a relatively modest revenue outlook for the second half of the year," he said. As a result, Nike will continue to focus on strong gross margin execution and disciplined cost management. ”
In order to turn things around, Nike is brewing a "self-help operation" on an unprecedented scale. According to the latest financial report, the sportswear giant has launched a series of discounts** on the one hand, and on the other hand, it plans to achieve cost savings of $2 billion over the next three years. This ambitious "cost revolution" involves simplifying product assortment, increasing automation and technology adoption, streamlining the organization, and leveraging economies of scale to improve efficiency.
First of all, with the popularity of outlet stores among young consumers, Nike's discount** activity seems to have become a new trend of "punching in" in the new era. Taking the world's largest "Nike Preferred Experience Store" newly opened by Guangzhou Wanguo Outlets in September this year as an example, it was crowded on the opening day, with daily sales of up to 10.05 million yuan, and the scenery was unlimited for a while.
However, this short-term revenue boom has not overshadowed Nike's long-term woes. According to the financial report data, at the end of fiscal year 2023, Nike's inventory reached $8.5 billion, the same as the same period last yearNet profit was US$5.1 billion, down 16% year-on-year. Heading into fiscal 2024, inventory in the first quarter was $8.7 billion, down 10% year-over-year and up 2.0% sequentially4%；Net profit was $1.5 billion, down 1% year-on-year. This suggests that Nike's inventory and net profit position have not fundamentally improved, despite the short-term sales growth from the discount**.
Entering the second quarter, under the combined effect of industry demand and Nike's multi-faceted initiatives, the effect of destocking is more obvious. According to the financial report, in the second quarter of fiscal year 2024, Nike's inventory during the period was $8 billion, down 14% year-on-year and 8% quarter-on-quarter. However, this was mainly driven by short-term factors such as special holidays, improved sales channels and discounts**. The company revealed in its earnings conference** that during the "Black Friday" and Thanksgiving long weekends, the number of consumers shopping at Nike stores hit an all-time high.
Therefore, it remains to be seen whether this short-term boom will be sustainable. For Nike, over-reliance on discounts** can lead to negative effects such as damaged brand image and reduced consumer loyalty. At the same time, frequent discounts** can also put pressure on Nike's pricing strategy and profit margins.
From this point of view, although Nike's discount** has achieved some success in the short term, in the long term, the company still needs to find a more sustainable and healthy development path. How to effectively manage inventory and net profit while maintaining brand image and consumer loyalty will be an important challenge for Nike in the future.
Second, Nike, who has mustered the courage to reinvent its organization, has found that the change has not come without a cost. According to the financial report, Nike expects to generate about 400 million to 4$500 million in pre-tax restructuring charges, the majority of which were employee severance payments. This is undoubtedly a serious test of Nike's finances.
Under the dual pressure of the continued strength of the dollar and the continuous decline in wholesale orders, Nike has not had an easy time. Especially in the Greater China region and the EMEA market, macro headwinds are like a sharp sword, piercing the heart of Nike's performance. Faced with the dilemma of weak traffic, Nike had to adjust its digital growth strategy and increase marketing investment in an attempt to turn the tide.
However, the willingness to buy luxury goods in the domestic market is continuing to decline, and the rise of domestic products and consumers' pursuit of high cost performance and practicality have made domestic apparel brands such as Anta and Li Ning win the trust of more and more consumers.
In the past ten years, the top sports footwear and apparel brands in the Chinese market have shown a strong "siphon effect", and the market share of the industry's CR5 has increased from 44 in 20115% soared to 57 in 20221%。At the same time, the market share of domestic sports brands has also increased from 24 in 20136% to 38 in 20223%, the change in this number not only reveals the change of the market pattern, but also highlights the maturity of consumers' perception of sportswear brands.
According to the Guoxin ** research report, during the Double 11 period in 2023, among the top 5 Tmall sports brands, Chinese brands occupy three seats, namely FILA, Anta, and Li Ning. The formation of this situation has undoubtedly put huge pressure on international brands such as Nike. When Nike had to fight a "defensive war", it provided an opportunity for China's leading sports brands to fight an "offensive war".
Taking ANTA Sports as an example, the company released its development plan for the next three years (2024-2026) in October 2023. The Group ambitiously stated that in the next three years, the ANTA brand turnover will maintain double-digit growthThe FILA brand will achieve the goal of 400-50 billion turnover;The Descente brand and KOLON Sports will strive to build the group's third 10 billion brand. This series of initiatives undoubtedly demonstrates the offensive posture of Chinese brands and their ambitions for the future market.
Against this backdrop, the growth rate of many international apparel brands led by Nike in China is slowing down, and the company's performance guidance for the second half of the fiscal year has also been lowered, indicating difficult challenges ahead.
This series of negative factors has led Nike's management to expect negative revenue growth in the third quarter, and the expectation for the fourth quarter has improved, but the growth rate has remained in the low single digits. For a company that still has a price-to-earnings ratio of 30 times, such a prospect is clearly not optimistic. Nike's future path is full of challenges and uncertainties, and how to seek a breakthrough in the difficult situation will be a question that its management needs to ponder.
Investors can't help but ask: Is Nike's ** era really over?
What was once an industry giant is now facing unprecedented challenges. In an increasingly competitive market environment, it remains to be seen whether Nike can bounce back through this "cost revolution".
The analyst is CFA**, Master of Finance, Data Analyst].
Author | ivo kolchev rickzhang