Charlie Munger didn’t like Nike (NYSE: NKE), but its new CEO is taking a page straight out of Warren Buffett’s playbook

Charlie Munger—the longstanding business partner of Warren Buffett who was heralded as the architect of the investment conglomerate they ran together—never liked the idea of buying Nike (NYSE: NKE) shares, but the new CEO of the athletic footwear titan is taking a page right out of the Berkshire Hathaway (NYSE:BRK.B) playbook as he works to get the company back on track after a rough couple of years.

“I’ve looked at it, but I don’t like style companies,” Munger said when asked for his thoughts about Nike during what was his first, and last, longform podcast interview; it aired just a month before the 99-year-old passed away last year. “I suppose if you offered me Hermes at a cheap enough price, I’d buy it,” he continued. “But short of that, I’m not going to buy any style company.”

Anyone who had listened to Munger would have avoided the 20% decline in Nike shares since he made those comments 14 months ago. While Berkshire has long favored investments in iconic American brands from Coca-Cola (NYSE: KO) to Kraft Heinz (NASDAQ: KHC), the firm has a preference for easier to predict businesses that aren’t subject to the whims of fashion that can change on a dime. Buffett first said back in 1994 that he didn’t understand the long-term value proposition of Nike’s business. 

Despite the rhetoric, the investment firm does have some experience when it comes to making shoes, and the new CEO of the world’s biggest sportswear company seems to be following its lead. Elliott Hill—who started at Nike as an intern in 1988 and rose to run marketing before retiring in 2020—returned to lead the company earlier this year after a disastrous few quarters that saw declining revenue, heavy discounting and waning interest in famous footwear franchises like Air Jordan. He promised a drastic turnaround in his first earnings call since taking over, and his plan could come straight out of a Buffett masterclass. 

‘Lost our obsession’

“We lost our obsession with sport,” Hill told investors, recounting two months of meetings he had with employees, customers and other partners. “Moving forward, we will lead with sport and put the athlete at the center of every decision…We will get back to leveraging deep athlete insights to accelerate innovation, design, product creation and storytelling.”

It all harkens back to a playbook that was once deployed at Brooks Running, a specialized shoemaker that became an independent Berkshire subsidiary in 2011 and turned its business around from doing as little as $60 million a year in revenue to more than $1 billion. Jim Webber—the unit’s former CEO who stepped down earlier this year—attributed reversal of fortunes to a razor-sharp focus on the customer, detailing the successful efforts in a leadership memoir titled Running with Purpose.

Webber has said that the best advice he ever received from Buffett was to focus on building the strongest brand possible. “This long-term thinking about really building a brand of strength is what makes Berkshire so unique, and him so unique,” he recounted in an interview with CNBC. “Brands are built over years and years and years. And they’re built on trust.”

Narrow the focus 

After being absorbed by Berkshire, Webber said the company decided to narrow its focus on the running market, and he recounted how Buffett had advised him to keep from getting bogged down by the things he couldn’t control. “I have no idea where the currency is going, so I don’t spend any time thinking about it,” Webber says Buffett told him once while the company was facing foreign exchange issues in Europe. “If you focus on your customer, you’ll navigate through it.”

It’s all seemingly simple advice, but it’s exactly where Nike seems to have gone off track over the past several years, with ill-fated efforts to cut out wholesale partners and expand its own online retail sales platform. In the latest call with investors, Nike’s new CEO acknowledged the mistake in its shift “away from creating demand for our brand to capturing demand.” He said the company was preparing near-term actions and that it would move fast.

“We’re going to focus in on five sports to start with: running, basketball, training, football, and sportswear,” Hill said. “And while we have 10 key countries and 12 key cities, we’re going to focus our efforts on three key countries and five key cities. So, we’re really going to narrow down.” He also promised to reduce markdowns that negatively impact the brand and disrupt the profitability of wholesale partners just as the company is trying to regain their trust. “Being premium also means full price,” Hill said, noting recent discussions he’s had with retail chains including Dick’s Sporting Goods (NYSE: DKS) and Foot Locker (NYSE: FL).

Stiff competition

With annual revenue around $50 billion, Nike is undoubtedly a more complex organization than Brooks Running, and Hill clearly has his work cut out for him. Despite all the talk about reducing markdowns, it’s had to embrace heavy discounting over the holiday period as it works to clear out inventory. The company, meanwhile, is continuing to face competition from rising stars like On Holding (NYSE: ONON) and Hoka-maker Deckers Outdoor (NYSE: DECK), whose shares have surged 102% and 82% this year, respectively. It’s fair to assume they’re both well aware of the Buffett playbook, too.

Buffett is a value investor known for buying wonderful companies at fair prices, but Berkshire has long been wary of the fashion and apparel industry due to its low barriers to entry, rapidly shifting consumer preferences and slim margins. It currently doesn’t own any stocks in the highly competitive sector and tends to prefer more predictable industries like consumer staples and insurance. 

“I don’t understand their competitive position and the likelihood of permanence of their competitive position over a 10 or 20 year period,” Buffett said of Nike back at Berkshire’s 1994 shareholder meeting. It was a solid read on reality. Fashion and branding can be a fickle business, and there’s always an upstart, chasing from behind, looking to win both the sprint and the marathon. While it would be premature to count Nike out, it will likely be another couple of quarters before the company starts to see if any of its efforts start to take hold and help it reclaim its footing.