Nike needs to tread in Adidas’ footsteps

Incoming Nike Inc. Chief Executive Officer Elliott Hill could learn a lot from his counterpart at Adidas AG Bjorn Gulden.

In formulating his strategic blueprint, Hill should follow Gulden in making Nike nimbler and introducing some winning products, like Adidas’ Samba.

But he should take a leaf out of Gulden’s book in another way too: He should not miss the opportunity to reset sales and earnings expectations lower for the coming fiscal years, making them more realistic and reflective of  the fact that it won’t be quick or easy to turnaround the Nike juggernaut.

Nike laid the groundwork for this on Tuesday when it withdrew guidance for the year to the end of May 2025, choosing to set expectations quarterly instead.

This came after first quarter sales fell 10% to $11.6 billion. Nike anticipates another 8% to 10% decline in the second quarter, as it deliberately cuts back on the supply of styles such as the Nike Dunk, Air Force 1 and Air Jordan 1, where demand had waned after initial popularity. The gross margin will likely be down by 1.5 percentage points. It expects trends to gradually improve in the second half of the year.

The company has also postponed an investor day that was due to take place next month to give Hill more time to come up with his revival plan. 

When Gulden arrived at Adidas in January 2023, he found a company in crisis. Adidas had ended its lucrative, almost decade-long partnership with rapper Kanye West, now known as Ye, and was stuck with a closet full of old Yeezy sneakers. Consequently, he warned that Adidas could make up to a €700 million operating loss in 2023, much worse than expected. Though this was painful for investors, it cleared the decks, enabling Gulden to rebuild, which he has admirably. The shares have risen about 70% since.

Of course, Nike doesn’t face the sort of backlash that engulfed Adidas after West’s antisemitic comments.

But it has a raft of challenges, including a lack of buzzy new shoes and competition from upstarts including On Holding AG and Deckers Outdoor Corp.’s Hoka.  Meanwhile, tastes have shifted to lower-fitting retro styles — where Adidas excels — from Nike’s chunky baseball styles, which also command high margins. 

After the excitement around Hill’s appointment two weeks ago, which sent the shares up 10% through Tuesday, reality is dawning that a revival won’t be instantaneous.

The first-quarter performance underlines the challenges. Sales of the Dunk, Air Jordan 1 and Air Force 1 fell almost 50% through Nike’s own digital channels, although the performance was much better through third parties. Overall, the company’s lifestyle business — worn on the street rather than the gym — and the Jordan brand declined by a percentage in the double digits.

It’s also taking time to reconnect with retailers, with order books for ranges due to hit stores in the spring somewhat lower than expected. Meanwhile, conditions in China are tough. However, there were glimmers of hope; for example, new products such as the 41st iteration of its Pegasus shoes, the centerpiece of Nike’s running business, are selling well.

Hill, a company veteran, should be able to build bridges with retailers — something that Nike badly needs after it prioritized its own website and stores. But he doesn’t come from a product-creation background.

The hope is that he will be able to galvanize Nike’s designers and sneaker developers so they can bring more hit shoes to the market. Nonetheless, new models can take a year or so to arrive in stores.

The first-quarter performance matters little to investors —the CEO change already indicated that Nike was far from firing on all cylinders.

The company is wise to allow Hill more time to formulate his strategy. It should also ensure that any future guidance isn’t only grounded in realism but can be achieved. By getting all the bad news out of the way early, Hill can create a solid platform from which to go forward.

Gulden was able to re-energize Adidas by doing a better job of dealing with the Yeezy inventory than expected. But the main driver was noticing that the company’s so-called Terrace styles, led by the Samba, were finding favor with fashionistas, and ramping up the production.  Now that the sneakers are ubiquitous,  he is drawing on other styles, such as the Superstar and low-rise retro models from the Adidas archive, and delaying new releases. This has enabled Gulden to constantly beat expectations.  In July, he upgraded the forecast of full-year operating profit to €1 billion.

Indeed, if Hill does follow the same playbook and clears out Nike’s own closet full of out of fashion Dunks and Jordans, he had better make sure he outperforms too.