The Rundown - Deep Dive: How Nike Lost Its Cool

Episode Date: December 21, 2024

Nike, once a cultural powerhouse defined by iconic athletes like Michael Jordan and collaborations with fashion legends, is facing a tough year marked by plummeting sales and a sharp drop in stock value. The company's struggles are partly due to missteps under former CEO John Donahoe, whose focus on direct-to-consumer strategies alienated wholesalers and led to an over-reliance on trends like Dunks. Now, with veteran Nike insider Elliott Hill at the helm, the company is looking to rebuild relationships with retailers, revitalize its product line, and re-engage with its core fanbase. While Nike’s future is uncertain, investors received a glimpse into what to expect when the company delivered its first earnings report under Hill this week.Follow our new Instagram account⁠@TheRundownDailyThe content of the video is for general and informational purposes only. All views presented in this show reflect the opinions of the guest and the host. You should not take a mention of any asset, be it cryptocurrency or a publicly traded security as a recommendation to buy, sell or hold that cryptocurrency or security. Guests and hosts are not affiliated with or endorsed by Public Holdings or its subsidiaries. You should make your own financial and investment decisions or consult respective professionals. Full disclosures are in the channel description. Learn more at Public.com/disclosures.Past performance is not a guarantee of future results. There is a possibility of loss with any investment. Historical or hypothetical performance results, if mentioned, are presented for illustrative purposes only. Do not infer or assume that any securities, sectors or markets described in the videos were or will be profitable. Any statements of future expectations and other forward-looking statements are strictly based on the current views, opinion, or assumptions of the person presenting them, and should not be taken as an indicator of performance nor should be relied upon as an investment advice.

Welcome back to a weekend edition of The Rundown where we do a five-minute deep dive on one topic. Today, we are talking about a brand that's been synonymous with sports, culture, and cool. I'm talking about Nike, and it's been a pretty tough year for the iconic company. Sales are suffering the worst drop in decades. The stock has lost more than half its value since the peak in 2021, and then in September, the company fired their CEO. Things are kind of a mess right now at Nike HQ in Portland. But how did Nike, a company that defined generations with Air Jordans and their Just Do It slogan and collabs with fashion icons like Virgil Ablo, lose its footing?

And what are they doing to recover it? That's what we're talking about in today's episode. So let's dive in. To kick this episode off, I want to first start with how Nike actually became cool in the first place. And then we have to go all the way back to 1984. There was a rookie basketball player coming out of the University of North Carolina, 6-6 shooting guards. Michael Jordan. You might have heard of him. And Nike took a big gamble on Michael Jordan. They went all in on him. Nike signed Michael Jordan to a $500,000 contract, which at the time in 1984

was a huge amount of money to pay for an unproven player. And that gamble paid off in a massive way. Nike launched their first signature shoe, the Air Jordan once. And these shoes were so cool and so bold that the NBA actually banned them because they didn't follow the uniform rules. But then Nike being the marketing genius they are, they paid the fine so Jordan could keep playing with those shoes on the court. Nike capitalized on this active defiance as a form of advertising. And this got a lot of people's attention.

Air Jordans became an instant cultural phenomenon and sales for the Air Jordans exceeded $100 million in just the first year. That is crazy. But Nike wasn't done making an icon. moves in the 80s. In 1988, Nike showed off their latest slogan, just do it. And I think that has to be the most iconic slogan of all time. On a side note, there's actually a really crazy backstory on how the slogan came to be. It's actually an inspiration that came from a convicted murderer. Nike's ad guy at the time, Dan Whedon, got the idea from Gary Gilmore. He was a man on

death row. And Gilmore's last words were, let's do it. Nike's ad guy tweaked that to just do it, and the rest is history. So by the mid-90s, Nike's cultural relevance transcended sports. They were a worldwide, well-known brand. It also probably helps that Michael Jordan won six NBA titles, and it's considered to be the greatest basketball player of all time. But beyond just sports,

you could see their influence in hip-hop and fashion too. Like Nelly dropped the song Air Force Ones in 2002, and then eight years later, Mack Miller gave us the Nike's On My Feet song. Great song. And it wasn't just music. Virgil Ablo's collaboration with Nike made them streetwear icons as well.

So they're covering sports, celebrities, fashion, music. I mean, the swoosh was everywhere. So where did it all go wrong? Let's talk about some of the challenges the company faces today. Well, first of all, there's the sales lump. You know, after years of dominating, Nike's revenue has slowed down. Nike has reported a decline in sales for three consecutive quarters. Analysts now expect that fiscal year 2025 revenue to fall by 5%,

which would be the biggest annual decline for the company since 1999. And when the company reported, earnings in June of this year, the stock fell by 20%, which was the worst day ever for the stock. So what did Nike do to cause such a huge drop in their sales? This might be a good time to talk about John Donahoe. John Donahoe was the CEO of Nike between 2020 and 2024. And he made some interesting choices during his time as CEO. I mean, him just being the CEO of Nike was already kind of unusual because Donahoe was an outsider and he wasn't really a shoe guy. The guy that Donahoe was replacing was Mark Parker, who'd been the CEO of Nike since 2006.

And he could not have been more different than Donahoe, all right? Because Mark Parker had worked at Nike for decades, and Mark Parker was a sneakerhead through and through. In fact, Mark Parker designed some of Nike's most iconic shoes. Donahoe, on the other hand, he was more of a suit, you know? In fact, he had a consulting background working at Bain. So that kind of paints the picture right there. He also worked as the CEO of eBay and Service Now.

Now, two big tech companies, but not much overlap when it comes to sneakers and retail. And so I guess looking back, we really shouldn't be surprised that Donahoe wasn't really a great fit as the CEO of Nike. I mean, he came in and just had to shake things up. Like, for one, he shifted Nike's strategy to be more direct to consumer. He wanted to sell shoes directly to consumers using Nike's website. And that strategy shift strained Nike's relationship with retailers like Foot Locker. See, typically, stores like Foot Locker have been a huge part.

part of Nike's sales pipeline. But by going direct to consumer, that hurt Nike's relationship with these retailers, which ultimately affected Nike sales. This also opened up the window for a resurgence of some of the old school favorites, like New Balance and Puma, and new players coming in like Hokas and On. New Balance, other sales grow by 23% in 2023. On sales grew by 50% to $2 billion last year, and Hokka's running shoes generated $1.8 billion in sales last year as well for Decker's.

By the way, I'm a father of two now, and new balance shoes, they're fantastic. I don't care what anybody says. I think the other strategy mistake that Nike did was they went a little too heavy with the retro re-releases. They released a lot of the classic shoes, like the old Air Force ones. And some of the old school Jordans, they also have their dunks line as well. And, you know, that worked for a little bit. But they released too much supply, and the sneaker community just kind of got over it. And eventually sales started drying up.

And I think this goes back to John Donahoe. There is a culture around sneakers and being a sneaker head, and he just didn't get it. He tried to run Nike like he was running Bain, and you just can't do that with the cultural force that is Nike. I think the Nike board of directors realized that, and Donahoe was replaced in September for Elliott Hill. Elliot Hill officially took over as Nike CEO on October 13th, and this dude is a Nike lifer. All right?

He started at Nike back in 1988 as an intern. and he worked his way up to be a high-level executive before retiring back in 2020. So he's been there through the ups and downs. He knows Nike inside and out. And he has a plan to turn things around. For one, Elliott Hill expects to focus on rebuilding relationships with wholesalers and retailers, while also re-energizing Nike's direct-to-consumer efforts. It's going to be tricky to pull off, but that's his goal.

He's also looking to increase in innovation, so new products, new partnerships, and more importantly, re-energizing the core fan base, with fresh ideas. On Thursday of this past week, Nike delivered its first earnings report under Hill as CEO, and let's just say Elliot Hill has a lot of work to do to turn things around. Nike reported an 8% decline in sales. They also reported a 26% decline in profits. Elliot Hill blames deep discounting as the reason for the declining revenues and profits. He says they've gone too far with promotions, and he plans to put an end to that. Listen to what he said in the latest earnings call.

Entering the year, our digital platforms were delivering roughly a 50-50 split of full price to promotional sales. The level of markdowns not only impacts our brand, but it also disrupts the overall marketplace and the profitability of our partners. We will return Nike direct digital and physical to premium destinations that lead the sports industry. They'll elevate the consumer experience and be the ultimate representation of the Nike brand. So can Nike get their mojo back?

I mean, I think time will tell. But with someone like Elliot Hill in charge, who's been at the company for so long, I think they have a fighting chance. Well, all right, guys, that's it for today's episode of The Rundown. Thank you guys so much for tuning in to a quick deep dive of Nike's past, present, and potential future. If you guys enjoyed today's episode,

be sure to subscribe to the podcast. And if you have like 20 extra seconds, consider giving us a five-star rating. And let us know what you think about these weekend deep dives and even suggest some topics that you think that we should cover. Thank you guys again for listening. and spending your weekend with us. Shout out to Mike for all the help behind the scenes.

Have a great weekend, everybody. And we'll see you guys back here on Monday. This is the rundown, your real-time resource for news events and trends in the markets. All views presented in the show reflect the opinions of the guests. You should not take any mention of a publicly traded security as recommendation to buy, sell, or hold that security. Rundown guests are not financial advisors and are not affiliated with public holdings or subsidiaries. You should make your own financial and investment decisions or consult.

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