Nike: An improvement that leaves something to be desired

The sports equipment manufacturer should be able to catch its breath a little today after the publication of its quarterly results. However, the underlying situation remains unchanged. This is obvious when you take a step back and look at the stock chart: Nike is still down nearly 60% from its 2021 highs.

Sometimes it doesn't take much to bring back a smile. Despite the sharp decline over the past three years, investors have not completely turned their backs on the brand: its valuation multiples remain relatively intact compared to pre-pandemic levels. This is undoubtedly because the current difficulties are due more to competitive pressure and various external factors than to internal strategic errors.

The situation could therefore be worse. For consumers, Nike remains iconic sportswear. The brand remains associated with some of the most famous athletes, including Victor Wembanyama, Eliud Kipchoge, Carlos Alcaraz, LeBron James, and Kylian Mbappé. Its image also remains firmly rooted in the world's biggest international competitions.

So why is Nike stuck in this downward spiral?

Competition from new trendy brands has seriously shaken Nike. These include Hoka (Deckers) and On, as well as Asian players such as Anta and Li-Ning, not to mention long-standing rivals such as Asics and Adidas. The group is particularly struggling in Asia, its second-largest market: outside China, sales are up by a token 1% (excluding currency effects), while in China the situation is deteriorating significantly, with sales down for the fifth consecutive quarter, this time by 10%.

On the other side of the Pacific, the situation is also worrying. Nike now estimates the impact of tariffs at $1.5bn, more than an initial estimate of $1bn. This adjustment is quite logical when you consider that almost all of its shoes are produced in countries that are subject to these taxes, particularly Vietnam.

Adding to this explosive cocktail is a global economic environment that is still tense, which is forcing people to limit their leisure spending and purchases of non-essential items. As a result, average selling prices are falling, while the cost of sales, marketing and sponsorship expenses, and payroll are eroding profitability. As a result, operating income fell 28% y-o-y, further weighed on by the complete collapse of Converse, whose revenue and operating income slumped 28% and 68% respectively.

Nike and its CEO, Elliott Hill, who was urgently hauled back out of retirement - he started out as an intern at the company - are working to lay the foundations for a restructuring. The brand intends to refocus on certain sports, starting with running, an ultra-trendy market, despite fierce competition. It is also banking on its women's "athleisure" line, a segment that combines sports and leisure (e.g., leggings and yoga clothes), which is very promising but also already contested by rivals such as Lululemon and Alo Yoga.

The outlook for this year remains bleak. Margins are expected to be below 2020 levels. Without a real positive catalyst, Nike seems doomed to remain stuck in this rut.