New Nike CEO is about to see the extent of issues he has to fix

Nike Inc.’s newly appointed Chief Executive Officer Elliott Hill is about to find out the full extent of the problems he’s inherited. 

The world’s largest sportswear company will report earnings on Tuesday afternoon, with analysts expecting sales to fall about 10%. Nike shares rose less than 1% on Tuesday ahead of its earnings report. The stock had been down about 19% through Monday’s close.

Much of the numbers won’t matter to many investors, who say the current quarter is a bit of a throwaway as they await the new CEO’s strategy. 

“The idea here is that everyone understands that Nike stock now will be predicated on what Elliott does in the future, and that isn’t something that can be really addressed,” said Simeon Siegel, an analyst at BMO Capital Markets. “This is a picture of a reality we already know has been changed.”

Hill, a Nike veteran who started as an intern decades ago, is coming out of retirement to take the top job on Oct. 14. He replaces John Donahoe, who took over the top job in 2020 when sales were soaring, but oversaw Nike during one of the most tumultuous years in the company’s half-century history. 

Nike’s board selected Donahoe, the former eBay Inc. and Bain & Co. boss, for the top role with the hopes he would use his e-commerce expertise to transform the company into a digital powerhouse. He halted or reduced the flow of sneakers to more than half of the company’s retail partners, in favor of Nike’s own stores, websites and apps.

Under Donahoe, Nike hit its $50 billion revenue goal, boosted by rapid growth around its lifestyle sneakers, such as Dunks and Air Force 1s. But as demand for those products cooled last year, executives were left scrambling to find items to replace them in the face of growing competition from brands such as On, Hoka and Salomon, which quickly filled the shelf space in stores that Nike had vacated.

In December, Donahoe presented a plan to cut $2 billion in costs, including a 2% reduction of Nike’s workforce, which it rolled out in phases in the first half of the year. Then, in June, Nike had its worst day in the stock market since going public in 1980. Executives forecast at the time that sales would slide in the company’s current fiscal year. That ramped up investors’ pressure on Donahoe and his leadership team.

Slowing Development

Meanwhile, at Nike headquarters in Beaverton, Oregon, product development had slowed as the company dealt with pandemic crises and leaned on its existing lifestyle shoes. Executives have said they’re resetting the product pipeline with a three-year blitz that started ahead of the Olympic Games in Paris this year.

When Hill takes over as CEO, investors will be looking for answers on how he plans to rebuild those relationships with spurned retailers, retain staff who’d lost faith in the previous regime, and speed up innovation to bring new products to market.

Nike’s investor day is set for November, but analysts expect management to move it back to give Hill more time to formulate a detailed turnaround plan.

“Expectations are very low. We know that business in North America is soft and China is not so good,” said David Swartz senior equity analyst for Morningstar. He predicted that the company’s fiscal first quarter “is going to be sort of the bottom in terms of sales declines, and it’s going to get a little bit better as we go through the fiscal year.”