Nike (NYSE: NKE) seeks a comeback victory
When a big, successful company runs into trouble, it’s often difficult to rebound — just ask the US auto industry. But some companies do come back — just look at Microsoft (NASDAQ: MSFT).
Athletic apparel giant Nike (NYSE: NKE) is one trying to make a turnaround now. After climbing consistently since its 1980 IPO, the stock has tanked 52% over the past three years. The plunge resulted from a combination of self-inflicted wounds and increased competition in the industry.
On the self-inflicted side, Nike tried to replace it retail partners, such as Dick’s Sporting Goods (NYSE: DKS) and Foot Locker (NYSE: FL), with direct sales to consumers. But all the company accomplished through that was alienating the retailers.
It was unable to clear its inventory through its own sales channel. So now it’s offering discounts of up to 30% on its web site, annoying retailers even more.
At the same time, however, as part of its recovery plan, Nike is trying to revive relationships with retailers, giving more product to the same stores it shunned over the past few years.
The plan also includes a commitment to spend more on marketing and to return to its focus on sports. In recent years, the company has introduced a lot of leisurewear.
New CEO Elliott Hill acknowledged in a recent analyst call that “we lost our obsession with sports. Moving forward, we will lead with sport and put the athlete at the center of every decision.” He promised to sell more products at higher prices.
Nike also will seek to revive its pipeline of creative shoes and apparel. “We will get back to leveraging deep athlete insights to accelerate innovation, design, product creation, and storytelling,” Hill said. All this could hurt the company’s financial results short-term, but it’s playing the long game.
No new superstar products
Nike has been unable to come up with popular new products over the past couple years. Worker morale has slipped amid layoffs, and its previous CEO John Donahoe was forced into retirement in September. He was replaced by former company veteran Hill.
Hill has been well received thus far by Nike’s workers and others involved with the company. He has restructured the executive suite for marketing and operations, and achieved an extension for the company’s contract to supply NFL football uniforms.
Getting back to Nike’s problems, one has been the rise of running shoe brands like Hoka (NYSE: DECK), On (NYSE: ONON) and Brooks. They have eaten into its market share.
Not surprisingly, Nike’s earnings have slumped. Its revenue dropped 8% in the quarter ended Nov. 30 from a year ago, and net income sank 26%.
But Nike hasn’t drawn a death sentence. Morningstar analyst David Swartz believes in the company. “We view Nike as the leader of the athletic apparel market and believe it will recover from its recent problems,” he wrote in a commentary.
Nike ‘can maintain’ market share
He assigns Nike a wide moat, meaning he sees it with competitive advantages that will last at least 20 years. “That’s based on its intangible brand asset, as we believe it will maintain premium pricing and generate economic profits for at least 20 years,” Swartz said.
“While it does face significant competition, we believe it has proven over a long period that it can maintain share and pricing.”
Great companies surmount great obstacles. In 1992, there was speculation that both IBM (NYSE: IBM) and Citigroup (NYSE: C) were going under. While they haven’t lit the world on fire since then, they have both proven their durability.
Microsoft stock ended the 14-year tenure (2000-14) of CEO Steve Ballmer little changed amid ill-fated acquisitions and inadequate innovation. But shares took off after Satya Nadella took over from Ballmer, leading the company into cloud computing.
Of course, there are companies that never come back, such as former photography stalwart Kodak and Lucent Technologies, which included telecommunications research titan Bell Labs.
