"Dare to take risks; don't let your talents be buried in this mediocre land."

In a speech at the Stanford Graduate School of Business in 2014, Nike's founder Phil Knight probably did not foresee that 20 years later, the athletic giant would need to temporarily shed its title of "adventurer" and refocus on running, cautiously navigating treacherous watersThis shift brings to light the complexities that have emerged in the sportswear market, an arena where Nike has traditionally reigned.

On December 20, Nike Increleased its financial report for the second quarter of fiscal year 2025, covering results up to November 30, 2024. The numbers delivered a stark warning, as almost all key performance indicators showed signs of distressRevenue, net income, net profit margin, and gross margin all experienced declines, with the only positive growth seen in marketing expenditure—a sign of both urgency and desperation.

As Nike and its Converse brand face challenges with declining profits, newer competitors are gaining momentum at an astounding rate

The upstart running shoe brand On recently reported record net sales, while HOKA's revenues surged over 30% year-on-year during the second quarter of fiscal year 2025, marking it as a burgeoning engine of growth for its parent company, Deckers.

Meanwhile, the “old middle class” favorites like Salomon have continued to thrive, bolstered by their signature outdoor footwear, assisting their parent company, Amer Sports, in returning to profitabilityLululemon, focusing on women's running shoes and expanding into the men’s market, has made significant gains in China, further challenging Nike's position.

Old rival Adidas has also found its footing, with quarterly results showing profits increase as it unshackled itself from Yeezy inventory troubles, pushing its gross margin to a new high since 2023. Concurrently, domestic brands like Anta, Li Ning, and Xtep have taken significant strides in capturing consumer mindshare, with Anta's revenues surpassing Nike's in China for three consecutive years as of mid-2022.

Amid the tumult, veteran executive Elliott Hill has been appointed to lead Nike through these turbulent times

Taking over from former CEO John Donahoe, Hill has outlined a series of strategic reforms aimed at recovering lost market shareHis approach involves a closer examination of the company's core route, channel focus, inventory levels, and gross margins.

As Hill implements changes, Nike seems poised to streamline its operations and refocus on its comfort zone, all while remaining patient in hopes of reclaiming its former glory.

However, the company's current standing is concerning.

Despite slightly exceeding market expectations, Nike's latest report, which reflects the second quarter of fiscal year 2025, presents a troubling pictureThe company recorded approximately $12.4 billion in revenue, slightly up from the anticipated $12.1 billion but down 8% year-on-yearNet profit, too, exceeded projections—achieving around $1.2 billion—but still reflected a sharp year-on-year drop of 26%. Nike's inventory remains stable at $8 billion, although gross margins descended by 100 basis points to 43.6%.

Dividing the results by region reveals declines across all markets

Notably, Nike's performance in Greater China, a critical market, saw an 8% drop, reinforcing the notion that the region is experiencing a rugged downturn.

By channel, NIKE Direct revenues plummeted 13% to about $5 billion, heavily influenced by a 21% fall in NIKE Brand DigitalExclusive retail stores also contributed to this decline with a 2% decreaseIn contrast, wholesale revenues only shrank by 3%, amounting to $6.9 billion.

Breaking these numbers down further by brand, Nike's flagship brand recorded approximately $12 billion, an annual drop of 7%, with an 18% dip in operating profitConverse appears to be in even worse trouble, raking in about $400 million, down 17% year-on-year, suffering a staggering 54% drop in operating profit.

Analysts point to several root causes for these troubling figuresHill has indicated that the team feels the urgency to respondAfter discussions with Nike executives during conference calls, key issues have emerged:

  • The brand's losing its core focus on sports—evident by a lack of fresh and engaging products.
  • There is a significant imbalance in consumer engagement—both digital and physical traffic is dwindling, leading to lost connections with key partners.
  • Excessive promotions have eroded profit margins

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    At the start of the year, the ratio between full-price and discounted sales neared 1:1, which not only compromises Nike's brand but also disrupts the profitability of its partners.

These challenges have been brewing for several quarters and are widely viewed as the unintended outcomes of Donahoe's bold Direct-to-Consumer (DTC) transformation strategy.

Under Donahoe's leadership, which began in January 2020 with his unique background characterized by a strong focus on e-commerce, he steered Nike toward a DTC model which initially brought success and was emulated across the industry.

However, the flip side of this strategy has become apparentBy reducing the dependence on traditional wholesale partners—eliminating approximately half of them—Nike inadvertently created a supply void filled by competitorsAs a result, rivals including Adidas and New Balance have filled the gaps, gaining access to broader customer bases while brands like HOKA and On are constantly eating up segments of Nike's market.

During the first quarter of fiscal year 2025's earnings call, Nike’s CFO Matthew Friend acknowledged the company had perhaps over-invested in DTC initiatives—labeling it a "mistake".

Donahoe's approach—especially the sidelining of core sports themes—has drawn much criticism

By categorizing products by gender instead of sport, analysts warn that Nike risks losing its foothold in critical athletic segmentsMoreover, this focus seemed to promote cost management over innovative products—resulting in a spate of refined classic designs lacking substantive improvement or technology.

For instance, the recently launched Nike Air Max Dn leverages existing technologies rather than introducing new innovationsWhile releases of nostalgic models like Dunk, Air Force 1, and Jordan 1 initially generated enthusiasm, their stale updates have led to diminishing returns, threatening Nike's brand value, particularly in specialized running markets.

With each crisis compounding—be it in direction, innovation, or channel strategy—Nike finds itself grappling with slumping sales, excessive inventory, and declining profitability.

Facing pressure, Nike has brought the reins back to seasoned veteran Hill, who was appointed global CEO on October 14, 2024. Previously with Nike since 1988, his ascent to the C-suite comes with expectations of reinvigorating the brand's adventurous spirit—albeit with prudence at the helm.

In Hill's conference address, he articulated the imperative of “returning to sports,” emphasizing movement as the core of Nike's endeavors

He laid out initial priorities, focusing on key sports: running, basketball, training, soccer, and activewearCentralizing athletes in decision-making processes will reawaken insights vital for innovation and storytelling.

Further, Nike is refining its operational focus by categorizing products by gender and age, each field dubbed "Fields of Play". Given the decline in innovation impacting both online and offline traffic, Hill remains optimistic about the forthcoming seasons and the potential advancements to come in core categories—particularly running and training.

Key adjustments are also necessary concerning partnershipsAcknowledging previously strained relationships with wholesalers, Hill emphasizes the need to regain trust and restore compromised partnerships for mutual benefit.

Nike is gradually reinvigorating its partnerships with major retailers like Dick's, JD Sport, and Foot Locker, articulating a commitment to shared success

Furthermore, with digital sales remaining pivotal for marketplace viability, the goal is to curate a seamless consumer experience across both DTC and wholesale channels.

As inventory levels remain elevated, a return to signature shoe licensing helps alleviate concerns, with partners seeing interest in coveted stylesNevertheless, excessive promotions have marred profit margins, prompting the need for a well-thought-out approach to sales strategies, concentrating discounts around traditional sales seasons.

Additionally, in the wake of a renewed focus on sports marketing, Nike has recently re-signed contracts with various partners, including the NBA, WNBA, and international leagues, signifying its intent to remain active and visible in sports sponsorship and community engagement.

As Nike navigates these changes, newer players in the industry are swiftly advancingIn the third quarter of 2024, the Swiss brand On announced record-breaking sales of 636 million Swiss francs, reflecting a 32.3% year-on-year increase

Despite heavy losses in China—once Nike's robust market—On has managed to capture a youthful demographic, opening five new stores in the region during the reporting period and planning for more.

On's gross profit surged 34% to 385 million Swiss francs, hitting a high not seen since its IPO and showcasing its sales potential against Nike's declining figures.

Meanwhile, HOKA has established itself as a new stronghold, leveraging a 34.7% revenue surge to $571 million, enriching Deckers as a new cash cowTheir new president, Robin Green, formerly with Nike, is now in a prime position to steer HOKA further into competition with its former employer.

With increasing interest in outdoor activities, Salomon has also emerged, capturing market attention with its high-performing trail running shoes, aiding Amer Sports in recovering financially.

Lululemon remains a formidable contender in the women's footwear arena, leveraging its strong domestic market presence to branch into men's shoes, a strategic pivot that bolsters its competitiveness significantly.

Amidst these developments, old adversaries like Adidas are rejuvenating their strategies