Football weighs heavily on Nike’s dismal year

From BofA-Bank of America to Barclays, Goldman Sachs, and Morgan Stanley, analysts all agree, Nike is about to face its toughest fiscal year since 1999. The anticipated results, which will be disclosed tomorrow night in Italy, are expected to only be exceeded by downturns experienced during the recession and the pandemic. The sportswear giant is going through one of its most challenging periods in recent history. Additionally, the long-standing partnership between Nike and FC Barcelona, which has lasted for 26 years, may be coming to an end. The Catalan club is reportedly considering ending the current 105-million-euro per-season agreement prematurely, with Puma waiting in the wings, offering 216 million euros annually.

While Nike does not disclose specific data for each sport individually, market analysts estimate that football alone generates between 2 and 3 billion dollars annually, making it the most profitable team sport alongside basketball. The potential jeopardy of one of the longest-standing and most profitable technical sponsorship agreements in professional sports only adds to the broader corporate challenges and issues Nike currently faces. Sales forecasts for 2024 are disappointing, with growth projections hovering at only 1%, marking the Company’s worst performance in 25 years under ceo John Donahoe’s leadership, excluding years affected by the global recession in 2010 (-1%) and the pandemic in 2020 (-4%).

«We have revised Nike’s price target downwards from 125 to 120 dollars, while maintaining a neutral stance on the stock. Market attention is focused on favorable catalysts that could lead to revised opinions on the stock», BofA analysts explain. «One such driver could come from Nike’s ability to innovate and boost sales in key sectors such as running, women’s products, and the flagship Jordan franchise, alongside new releases for the Paris Olympic Games». This slowdown has prompted cost-cutting measures totaling 2 billion dollars over the next three years, including reducing the supply of some products, enhancing the supply chain, increasing automation, and a 2% reduction in the workforce, impacting over 1,600 positions. However, these layoffs will not affect retail and distribution centers, as well as the innovation team. The sportswear giant anticipates severance costs ranging between 400 and 450 million dollars for the current quarter alone.

«The financial performance of Nike in the second quarter marked a pivotal moment in fostering more profitable growth. Looking ahead to a weaker revenue outlook for the second half of the year, we remain focused on maintaining robust gross margins and disciplined cost management», Nike’s cfo, Matthew Friend, explained during the presentation of the biannual results. This issue is just the latest in a series of challenges for the Beaverton giant, confirming the crisis it currently faces. With an annual revenue of 51 billion dollars, 6 billion dollars of which come from the Air Jordan brand, even four decades after the signing of its sponsorship agreement with Michael Jordan, Nike remains the dominant player and undisputed leader both in the world of professional sports and the sportswear industry. This dominance is largely fueled by the sneaker segment, which has generated over 33 billion dollars in revenue alone.

Despite years, if not decades, of uninterrupted growth, there is a growing consensus among industry experts, analysts, and former employees suggesting that Nike may be on a path of decline, potentially becoming merely a sneaker brand. Last December, during the presentation of second-quarter results, the Company revised its fiscal year 2024 sales growth forecast down to a mere 1%. This would result in the worst performance for the Beaverton giant since the late 1990s, excluding downturns witnessed in 2010 (-1%), amid the economic crisis and global recession, and in 2020 (-4%), during the Covid-19 pandemic. Revenues are showing signs of deceleration in both North America and China, Nike’s primary markets, with the former recording a 4% decline to 11 billion dollars and the latter seeing a 4% increase to 3.6 billion dollars over the past six months, sparking concerns within the Company.

Since January 2023, Nike’s shares have plummeted by over 20% on the stock market, while competitors such as Adidas, On Holding, co-owned by Roger Federer, and Deckers, the parent company of Hoka have seen exponential growth. The German Giant has witnessed an average increase of 30%, whereas the Swiss Group has seen spikes of improvement reaching 70%. Meanwhile, the California-based company, which owns Hoka, is enjoying its best period yet, with its share price hitting an all-time high in the past year and experiencing over 100% growth in the last six months alone. However, the sharp slowdown in the secondary sneaker market raises alarming signals for the Company, which has historically been a key player, particularly since the rise of streetwear in the mid-2010s.

During those years, the resale market boomed as industry giants adopted a scarcity strategy, releasing limited-edition shoes in small quantities to amplify hype around their brands and products. Prices for the rarest Jordan and Yeezy models steadily climbed, reaching new heights during the pandemic. Due to the overwhelming number of collaborations and variations of retro sneakers, often reintroduced with slight tweaks, even the most avid collectors grew weary. Coupled with a sudden increase in the production of rare models, this led to a peak and subsequent disruption in the secondary market by the end of 2022. Over the past two years, Nike has aggressively marketed Air Jordan 1s and Dunks like never before, a trend mirrored by New Balance with its best-selling 550 silhouette. Adidas flooded the market with millions of Sambas and Gazelles, capitalizing on rising demand while abruptly severing ties with Ye (Kanye West) in 2022 and beginning to liquidate remaining Yeezy stock in various batches since last year. This shift created an opportunity for newer brands like Salomon, On (co-owned by Roger Federer), and Deckers with its flagship brand Hoka, emerging as new competitors to the established sportswear giants, poised to challenge their dominance.

In the battle for football jerseys, companies like Adidas and Puma have invested 2 billion dollars. But could Barça go in-house?

The football jersey business might soon see a new contender. Brands like Nike, Adidas, Puma, and New Balance are pouring billions into the market. However, FC Barcelona is reportedly considering the termination of its current 105-million-euro per-season agreement with Nike. The Catalan club is exploring the possibility of bringing jersey and off-pitch merchandise production in-house, with Puma allegedly offering 216 million euros per season to secure a deal, with New Balance also in the running. In the early 2000s, a similar attempt was made by Borussia Dortmund, currently sponsored by Puma, which attempted to increase revenues by producing jerseys internally but ultimately abandoned the strategy due to design and commercial feasibility issues.

Nike, Adidas, and Puma currently dominate the football jersey landscape, sponsoring major clubs like Inter Milan, Juventus, and AC Milan in Italy, respectively. The Beaverton giant also sponsors Paris Saint-Germain, where it introduced the iconic Jordan logo to football jerseys for the first time, as well as Chelsea and Liverpool. On the other hand, Puma sponsors reigning European champion Manchester City, while Adidas holds the most lucrative deals with Real Madrid at 120 million euros annually and a renewed contract with Manchester United for over 1 billion euros for the next ten years.

From Barclays to Morgan Stanley, there is a prevailing bearish tone

Experts are cautious about Nike’s stock. While margin opportunities appear robust, doubts linger regarding the sportswear Giant’s ability to innovate. «We are observing a particularly bearish sentiment towards Nike, the strongest since mid-2022 when the Company grappled with significant inventory build-up», Barclays comments, maintaining an overweight rating with a target price of 142 dollars. «Despite this, it remains our top pick, although we believe revenue recovery may not materialize until the end of the year. Nonetheless, the current risk/reward ratio appears compelling, even as stocks underperform with an 8% decline year-to-date».

Morgan Stanley echoes this sentiment, also maintaining an overweight rating, albeit slightly adjusting the target price from 125 to 124 dollars due to a slight reduction in projected revenue for the second half of the year. «We anticipate third-quarter and 2024 EPS to be at the high end of management guidance and slightly exceed consensus estimates», the analysts explain. Goldman Sachs takes a slightly different stance, maintaining a buy rating on Nike with a 12-month price target of 135 dollars. «While we acknowledge Nike’s innovation ability may be lagging compared to previous years and competitors, with new product releases declining by 8-10% since September, we still believe margin opportunities remain strong», they assert. Meanwhile, BofA holds a neutral rating with a target price of 120 dollars. «For a positive EPS revision cycle to kick in, innovation momentum is crucial», the analysts explain. (All rights reserved)