Nike, a leading athletic apparel company, recently announced plans to reduce costs by $2 billion over the next three years due to a decrease in its sales outlook. This news caused the company’s stock to fall by 10% after hours. Nike’s shares have been underperforming compared to the broader market, with only a 4.7% increase this year, while the S&P 500 has seen greater gains.
The company now expects its full-year reported revenue to grow by approximately 1%, compared to its previous outlook of mid-single digit growth. In the current quarter, which includes the second half of the holiday shopping season, Nike anticipates a slight decline in reported revenue due to challenging year-over-year comparisons. However, it expects sales to increase by low single digits in the fourth quarter.
Nike’s finance chief, Matthew Friend, explained that the company’s revised outlook reflects increased macroeconomic headwinds, particularly in the Greater China and EMEA regions. He also mentioned the impact of a stronger U.S. dollar on international sales and the challenges of managing wholesale orders in the second half of the year.
Despite the revised outlook, Nike still expects its gross margins to improve by 1.4 to 1.6 percentage points. Excluding restructuring charges, the company maintains its full-year earnings outlook.
As part of its cost-cutting plan, Nike aims to simplify its product assortment, increase automation and technology usage, streamline its organization by reducing management layers, and leverage its scale for greater efficiency. The savings generated from these initiatives will be reinvested to drive future growth, accelerate innovation, and enhance long-term profitability.
The company estimates that the restructuring efforts will result in pretax charges of $400 million to $450 million, primarily related to employee severance costs. Earlier this month, it was reported that Nike had been quietly laying off employees across various divisions, signaling a broader restructuring plan.
In the second quarter of its fiscal year, Nike exceeded earnings expectations but fell short of sales estimates for the second consecutive quarter. This is the first time since 2016 that Nike has experienced consecutive quarters of missed sales estimates. The company reported earnings per share of $1.03, higher than the expected 85 cents, and revenue of $13.39 billion, slightly lower than the anticipated $13.43 billion.
Nike’s gross margin, which had been declining for the past six quarters, saw a turnaround in the latest quarter. It increased by 1.7 percentage points to 44.6%, slightly surpassing estimates. This improvement can be attributed to a better inventory position compared to the previous year when Nike had to clear out old stock to make room for new products.
The retail industry has been facing intense competition and promotional activity, leading to steep discounts and markdowns. Nike’s strategic pricing actions and lower ocean freight costs contributed to the increase in gross margin, although they were partially offset by unfavorable exchange rates and higher input costs.
As one of the last retailers to report earnings before the holiday season, Nike’s performance will be closely watched by investors and consumers alike.