The first thing Nike (NKE -0.21%) tells you on its investor relations page is that it's a growth company. Its recent results, however, say the opposite. Revenue at Nike was flat in its fiscal third quarter at $12.4 billion, and was up just 1% in the first three quarters of the year.
Nike is facing a number of challenges that have led to its growth stalling. It's losing market share, especially in running, to upstart competitors like On Holding and Deckers' Hoka brand. It also said it was pulling back its supply of styles like the Air Force 1 and Pegasus running shoes, a sign that it's leaned too hard on classic brands. It also continues to be impacted by parting ways with Kyrie Irving, one of its biggest basketball stars, over a year ago.
As a result of those challenges, Nike stock is down 20% over the past year even as the broad market has soared, and it's off nearly 50% from its pandemic-era peak. It's easy to see why Nike stock has fallen as the stock is still priced for growth. However, Nike is now shifting its strategy in order to rebuild business momentum. Here's how.
Image source: Nike.
Shifting back to the wholesale channel
CEO John Donahoe said the company aims to "build a multiyear cycle of new innovation, sharpen our brand storytelling, and work with our wholesale partners to elevate and grow the marketplace."
The focus on the wholesale channel is new for Nike. In recent years, its strategy has been to shift away from wholesale and build its own direct-to-consumer brands. The company had said earlier that it would de-prioritize retailers who didn't elevate its brand, and aimed to take more control of its customer relationships. It also cut 50% of its wholesale partners, especially small independent stores, effectively cutting them off from Nike products.
However, it may have leaned too hard on that strategy as brand digital sales were down 3% in the quarter, and it now seems to have rediscovered the advantage of the wholesale channel.
Donahoe said on the earnings call, "We recognize that our wholesale partners help us scale our innovation and newness in physical stores and connect our brands in the path of the consumer." It was something of a mea culpa for a company that had stunned the footwear retail industry years ago by pulling its product from thousands of stores. However, it's the right move for Nike.
Can wholesale drive a comeback for Nike?
On some level, drawing back from the wholesale channel made sense. Direct-to-consumer sales tend to have higher margins, and the growth of the mobile economy set up an opportunity for Nike to build customer relationships through apps like SNKRS, Nike, and Nike Training Club.
However, dumping dedicated retail partners now seems like a mistake and is part of the reason why competitors like On and Hoka have been able to gain traction and take market share.
Nike forgot that it still holds the cards in these wholesale relationships. Foot Locker, for example, brought in roughly 65% of its revenue from Nike in 2022, and those businesses deliver customers for Nike. They also absorb some of the marketing and overhead costs in selling footwear and have the advantage of thousands of stores.
Recently, Nike has resumed its relationship with retailers like Macy's and DSW, which control billions of dollars in spending. Nike forgot that those relationships were a competitive advantage, and shelf space in those stores is an asset.
There's an argument for scarcity and exclusivity in some products. For example, Nike has employed that tactic well with its Jordan brand, but overall Nike is a mass-market brand. It makes sense for it to be available where consumers shop for sneakers.
Is Nike a buy?
It's likely to take time for the wholesale strategy to pay off, and Nike's guidance was part of the reason the stock sold off on the earnings report.
Management called for revenue to be slightly higher in the fourth quarter, but sees revenue down low single digits in the first half of fiscal 2025 as it cuts back on classics and other top brands before a return to growth in the second half of the fiscal year.
Given that forecast, investors are bettering off waiting for clearer signs of a recovery, but the decision to reinvest in the wholesale channel is the right move for the business, and it should pay off down the road.
