Nike faces uphill climb in sneaker wars

Nike has lost its stride. Once the pace setter in the $150bn a year global trainers market, the US sportswear giant is in the midst of its worst sales slowdown in decades. The company is expected to eke out only a 1 per cent increase in annual sales when it reports its fiscal 2024 results this month. Excluding the pandemic and the 2009 global financial crisis, that would be the company’s worst showing since 1999. Nike needs to return to its roots as a maker of innovative footwear.

The stock, down nearly 50 per cent from their 2021 peak, shows how far Nike has veered off track. A valuation of 25 times forward earnings is also well below its five-year average of 33 times.

Competition is one problem. Cautious consumers in its two key markets — North America and China — are another. But Nike has also made plenty of strategic mistakes of its own: chief among them is an overreliance on retro sneaker sales, insufficient investment and innovation in new products and neglecting the athletics market.

Under John Donahoe, chief executive since 2020, Nike leaned into the retro trend. It has substantially increased the number of new Air Jordans and Air Force 1 releases in recent years. The strategy worked to the extent that the Jordan brand pulled in $6.6bn in wholesale revenue in fiscal 2023, a 29 per cent jump from the year before.

The flipside is that Nike runs the risk of saturating the market. Jordan-driven sales growth has blinded Nike to growing competition in the performance products category that caters to casual and serious athletes.

In running, Nike has lost ground to Hoka. The high-performance running shoes, with their signature giant sole, generated more than $1.8bn in sales last year for parent company Deckers Brands, a 28 per cent increase from the previous year.

At On, an upstart running brand from Switzerland, sales grew by nearly 50 per cent to SFr1.8bn ($2bn) last year. Shares in Deckers and On are up 103 per cent and 44 per cent over the past year, compared to Nike’s 17 per cent decline.

Peddling in-demand brands to affluent customers means Deckers and On command pricing power. Gross margins at the two increased to 55.6 per cent and 59.6 per cent, respectively, last year. Nike’s margins hover around 45 per cent.

This battered stock offers plenty of potential. With annual revenues of $51bn, Nike remains one of the world’s most recognisable consumer brands. Profit is growing again thanks to cost cutting. But confronting new upstart rivals will require a faster pace of change.

pan.yuk@ft.com