Nike CEO John Donahoe's position seems precarious. The former eBay executive has been leading Nike since January 2020, but with bad news coming after a lackluster financial year, Wall Street has begun to lose confidence in him. #2024 Macro Outlook#
On Thursday, Nike warned that sales this quarter are expected to drop a stunning 10%, far exceeding the London Stock Exchange's predicted 3.2% decline. Prior to this, the company had experienced its slowest annual sales growth in 14 years, apart from the COVID-19 pandemic.
The company also noted that sales are expected to decline in the mid-single digits through fiscal year 2025, which was previously projected to grow.
These warning signals caused the stock price to slide by 20% at the close on Friday, making it the worst trading day in the company's history since it went public in December 1980. This drop reduced Nike's market cap by about $28 billion, from $142 billion the previous day to just under $114 billion.
As Wall Street digested the dim prospects of the world's largest sportswear company, at least six investment banks lowered their stock ratings on Nike. Morgan Stanley and Stifel analysts further questioned the company's management.
Stifel analyst Jim Duffy wrote, "Guidance for FY 2025 (5th consensus expectation cut in the last 6 quarters) pushes the turnaround further out to 2025 (or earliest possible beginning in the 4Q of 2025 or spring of 2025), requiring investors to not only support unproven styles success but wait out to 2H of 2024 under uncertain consumer discretionary spend that may accumulate momentum late 2025." "Management credibility is seriously challenged with increased potential for changes at C-level."
Since Donahoe took over as Nike's CEO, as of last Friday's close, its stock has fallen more than 25%, significantly underperforming the S&P 500 index and retail-focused XRT ETF, which have grown about 67% and 66%, respectively, over the same period.
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On Thursday, Nike CFO Matt Friend attributed the lowered guidance to various factors, some of which, such as weakness in the Asian market and complex forex risks, were beyond Nike's control, but other issues were directly related to the company's problems under Donahoe's leadership.
The company expects wholesale orders to slow as it adopts a direct-selling strategy in promoting new styles, reducing its classic range, and repairing its relationship with key retail partners, which Nike has increasingly tended to cut in recent years.
Meanwhile, loyal customers who have bought Nike's core series for a long time, such as AirForce1s, AirJordan1s, or Dunks, are no longer buying new ones from the company's website. Critics say that these sneaker series have dominated retailers' products for a long time, causing consumers to turn to a large number of emerging competitors looking for new styles and innovative designs.
This has forced Nike to win back some of its most important customers, running enthusiasts. As retailers focus on their direct-selling strategies rather than innovation, strong competitors such as OnRunning and Hoka have taken away market share.
"At the end of the call, they talked about running being a key sport for participants, which is almost comical... We knew this a long time ago. We knew that consumers have shifted their preferences after COVID, and they became more active," Jessica Ramírez, senior research analyst at Jane Hali & Associates, told CNBC, adding that Nike needs "a fairly significant" management change.
"During the pandemic, we saw consumers really starting to run and taking it seriously, and there were people running every day, but Nike didn't really respond to that," she said. "I think when management misses key consumer shifts, that's when things start to go wrong with the company...Something has changed, and they missed the point."
Kevin McCarthy, senior research analyst at Neuberger Berman, said on CNBC's program Thursday that the company needs a change in management, speculating that Donahoe's employment contract may soon be up.
"All of the problems you mentioned about this company seem to boil down to execution, management and other things," McCarthy said on CNBC's program.
"They have several internal candidates who are very capable...You have several former Nike people who are involved in the discussion, and then you have other competitors involved in the discussion as well. But I think it can be assumed that there will be a change in leadership at this company within the next six months."
To be fair, for Dona Hugh, the COVID-19 pandemic erupted severely less than two months after he took office, and he had to deal with closed stores, telecommuting, and sharp changes in consumer preferences and abilities.
Despite the company's stock price decline, Nike's annual sales under his leadership grew from $37.4 billion in fiscal 2020 to $51.36 billion in fiscal 2024, an increase of about 37%.
If you ask Phil Knight, Nike's founder and honorary chairman, Dona Hugh has done a great job.
"I've seen Nike's plans for the future and fully believe in them," the 86-year-old said in a statement to CNBC. "I am optimistic about Nike's future, and John Dona Hugh has my firm confidence and full support."