Breaking
July 17, 2024

Nike Announces $2 Billion Cost-Cutting Plan Amid Lower Sales Projections

AiBot
Written by AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

Dec 22, 2023

Nike unveiled a new cost-cutting plan on December 21st, seeking to save $2 billion over the next few years through layoffs and other measures, as the athletic gear giant confronts slowing growth.

Nike Misses Sales Estimates, Cuts Forecast

The company reported earnings for its fiscal second quarter that topped Wall Street estimates, but it missed revenue expectations and warned of weaker-than-expected sales growth going forward. Nike reported Q2 revenue rose 1% to $13.4 billion, shy of the $13.5 billion analysts predicted. Earnings per share came in at 85 cents, surpassing estimates.

However, Nike cut its full-year sales guidance to low single-digit growth, down from the mid-single digit growth it previously forecasted. Executives cited macroeconomic uncertainty across North America, Europe/Middle East/Africa (EMEA) and Greater China. Wholesale revenue fell 2% in Q2, as Nike continues working through elevated inventory levels. Sales also declined in Greater China amid COVID-related disruptions.

Key Nike Q2 Metrics Result
Revenue $13.4 billion, +1% yoy, miss
EPS $0.85, beat
Gross Margin 44.3%, beat
Inventories $9.7 billion, +44% yoy
North America Rev +4%
Greater China Rev -24%
2023 Sales Guidance Low single-digit growth, cut from mid single-digit

Data sources: CNBC, Barron’s

Nike shares plunged over 12% in after-hours trading following the report and guidance cut. The stock has lost nearly a third of its value in 2022 amid a broader market selloff.

$2 Billion Cost Reduction Plan

Alongside the results, Nike outlined a new plan targeting $2 billion in cost savings over the next few years to streamline operations. Initiatives include supply chain optimization, marketing efficiencies, and workforce reductions.

Nike aims to achieve roughly half of the $2 billion savings in its cost of goods sold, including through SKU and factory reductions. The other half is expected from lower SG&A expenses like marketing. Total costs are targeted to fall to about 53% of revenue, compared to the reported 55% in Q2 2023.

The plan also includes an undisclosed number of job cuts across the company. While details remain limited, the reductions will likely impact departments company-wide. Nike employed over 79,000 staff members as of May 2022.

“We are focused on shifting our resources to amplify our highest potential areas and increasing our agility,” noted CFO Matt Friend on the cost-savings goal.

The restructuring effort reflects Nike’s push to realign operations amid an increasingly challenging macro backdrop globally. Like many retailers, the Beaverton company continues working down elevated inventory levels. The plan aims to better position Nike for the current operating climate through lower costs and improved efficiency.

Management reaffirmed confidence that the Nike brand momentum remains strong despite recent headwinds. The company will continue investing selectively in key growth areas like digital.

“Our brand and business momentum remain strong amidst the increasingly volatile macroeconomic conditions,” said CEO John Donahoe. “We are taking decisive action to optimize our cost structure in order to fuel growth.”

Nike Faces Slowing Demand Across Major Markets

The latest results and forecast cut underscore broadly slowing consumer demand and high inflation impacts facing Nike across regions.

North America – Nike’s largest segment saw Q2 sales rise 4%, reflecting relative outperformance for the athletic giant. Yet the company is seeing signs of greater caution among consumers in its home market given economic uncertainty. Management expects promotional activity to remain elevated in North America as retailers work down inventory excesses.

Europe/Middle East/Africa – Q2 revenue in the EMEA region fell 5% excluding currency shifts. Alongside macro pressures, Nike continues being impacted by its scaled-back operations in Russia. Greater promotional activity also weighed on European results last quarter. The outlook for this region remains challenged in the near term.

Greater China – Among Nike’s most important growth markets, Greater China sales declined 24% last quarter excluding currency effects. Results were significantly impacted by COVID-related disruptions in the country. While lockdown impacts have moderated in recent months, the region faces a sluggish recovery outlook amid a weak consumer environment.

Outside of costs, Nike also announced plans to optimize its store fleet and reshape undifferentiated wholesale partners. The initiatives look to bring the company’s sales channels and brand presentation in line with shifting consumer patterns and preferences.

Reduced discretionary spending, inflationary pressures, and inventory corrections have combined to make for a difficult backdrop in Nike’s key markets globally. The new cost reductions and operational changes reflect management’s efforts to navigate the current climate while protecting long-term profitability and growth opportunities.

Outlook: Can Nike Regain Sales Momentum in 2023-2024?

With substantial cost cuts now formalized alongside Q2 earnings, attention for Nike turns to sales trends heading into the new calendar year.

The athletic giant enters 2023 with momentum clearly slowed by macro headwinds, regional disruptions, and crowded wholesale channels. But brand resilience and connections with consumers remain indispensable strengths for Nike.

Product innovation, as always, can provide sales catalysts in the year ahead. Exciting sneaker launches aligned with key sports moments have reliably driven energy for Nike’s business in the past. Any reopening tailwinds in China also would boost results substantially given the market’s scale.

However, with no improvement in discretionary spending patterns or economic instability yet in sight, a sales reacceleration appears unlikely over the coming quarters. Comps will face difficult comparisons from 2021-2022 stimulus-aided figures as well. Promotional pressures seem poised to linger until inventory levels meaningfully normalize.

In all, Nike appears well positioned to manage through an extended consumer cooldown thanks to its brand equity, cost flexibility, and pricing power. But investors will likely wait for concrete stabilization in end-market demand before regaining confidence in meaningful topline growth returning. With potential recessions looming across many developed economies, Nike’s opportunity to recapture strong sales momentum in 2023 remains cloudy.

AiBot

AiBot

Author

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

Related Post