John Donahoe, attends the first day of Allen & Company’s annual Sun Valley Conference, in Sun Valley, Idaho.
Drew Angerer | Getty Images
Nike CEO John Donahoe appears to be on thin ice.
Former chief executive of eBaywho has been at the helm of Nike since January 2020, has begun to lose the confidence of Wall Street as the company closed a weak fiscal year with more bad news.
On Thursday, Nike warned that sales in its current quarter were expected to fall 10% – much worse than the 3.2% drop that LSEG had forecast – after it posted its slowest annual sales gain in 14 years, excluding the pandemic Covid-19.
The company also said it expects fiscal 2025 sales to be in the mid-single digits, when it previously expected them to rise.
The warning signs caused shares to close 20% lower on Friday — making it the worst trading day in the company’s history since its IPO in December 1980. The decline wiped out about $28 billion in market capitalization of Nike, bringing it to just under $114 billion from $142 billion a day earlier.
As Wall Street digested the bleak outlook from the world’s largest sportswear company, at least six investment banks downgraded Nike shares. Analysts at Morgan Stanley AND Stifel took it a step further, specifically questioning the company’s management.
“FY25 guidance (the 5th downward consensus revision in 6 quarters) pushes the outlook for growth inflection further into 2025 (perhaps FY4 or spring ’25 earlier) urging investors to both ensure the success of unproven styles and see an uncertain consumer discretionary background in 2HCY24 until momentum can be rebuilt in 2HCY25,” wrote Stifel analyst Jim Duffy. “Management credibility has been severely challenged and the potential for C-level regime change adds further uncertainty.”
Nike shares have underperformed the S&P 500 during CEO John Donahoe’s tenure.
Since Donahoe took over as Nike’s top executive, its shares are down more than 25% as of Friday’s close, significantly underperforming both S&P 500 AND XRT – ETF focused on retail sales – which saw gains of about 67% and 66% respectively in that time period.
Nike chief financial officer Matt Friend on Thursday attributed the cut in guidance to a number of factors. Some, like the softness in China and the challenge against foreign exchange headwinds, are beyond Nike’s control, but others are problems it completely created under Donahoe’s leadership.
The company expects wholesale orders to be slow as it scales new styles, retires classic franchises and works to repair its relationships with major retail partners after spending the past few years cutting them in favor of a direct selling strategy.
At the same time, loyal customers who shop on Nike’s website are no longer looking for new pairs of Air Force 1s, Air Jordan 1s or Dunks, the company’s flagship franchises. Critics say sneaker lines have dominated retailers’ offerings for too long and driven away customers as they sought fresh styles and innovative designs from a host of new competitors.
This has allowed Nike to win back some of its most core customers – the runners. As the retailer focused on its direct selling strategy at the expense of innovation, weaker competitors such as On Running and Hoka grabbed market share.
“It was almost silly at the end of the call that they talked about running as such a key sport that consumers are participating in… We’ve known for a long time, we’ve known that the consumer has changed their minds post-pandemic, how much they are much more active,” Jessica Ramírez, senior research analyst at Jane Hali & Associates, told CNBC, adding that a management change at Nike is “quite necessary.”
“After the lockdown, we saw that the consumer embraced running and was serious about it and had an everyday runner, and Nike didn’t really respond to that,” she said. “I think when management is missing key consumer shifts, there’s a problem with your company … something has changed and they’ve missed the mark.”
Kevin McCarthy, a senior research analyst at Neuberger Berman, told CNBC’s Scott Wapner on Thursday that the company needs a change in management and speculated that Donahoe’s employment contract could expire soon.
“Everything you suggest is wrong with this company seems to come back to execution, management and everything else,” McCarthy said on CNBC’s “Closing Bell.”
“They have some internal candidates now who are very capable… you also have some former Nike candidates who have been in the discussion, and then you have other competitors who have been in the discussion. But I think it’s supposed to that the leadership of this company will change over the next six months.”
In fairness to Donahoe, the Covid-19 pandemic began in earnest in the US less than two months into his tenure, and he had to deal with closed stores, remote workers and a rollercoaster ride of changing consumer preferences and skills.
While the company’s stock may be on the decline, Nike’s annual sales have grown about 37% under his leadership from $37.4 billion in fiscal 2020 to $51.36 billion in fiscal 2024.
If you ask Phil Knight, Nike’s founder and chairman emeritus, Donahoe is doing pretty well.
“I have seen Nike’s plans for the future and believe in them wholeheartedly,” the 86-year-old told CNBC in a statement. “I am optimistic about the future of Nike and John Donahoe has my unwavering confidence and full support.”