How Nike’s Slowdown Is Crippling Retailers

Nike Air Zoom Generation
Nike Air Zoom Generation
Nike

Two consecutive negative earnings reports from the athletic industry’s biggest retailers have bolstered fears that a previously red-hot category — and its top brand Nike — are in the midst of a mega downturn.

The Finish Line Inc.’s second-quarter pre-announcement on Monday included news of dimming sales — down 3.3 percent, to $469.4 million — and a significant reduction in the outlook for the remainder of the year.

Competitor Foot Locker Inc. — which has led the specialty athletic retailer pack for several years — also spooked investors earlier this month when it announced that its Q2 sales fell 4.4 percent, to $1.7 billion, missing Wall Street’s consensus for sales of $1.8 billion. Comparable sales also declined 6 percent.

Profits took an even greater tumble — declining 60 percent year-over-year to $51 million, or 39 cents per diluted share. On an adjusted basis, profits were 62 cents per share — a significant miss against analysts’ forecasts for earnings per share of 90 cents.

While Finish Line has recently suffered several company-specific challenges, for the past two-plus years, Foot Locker has successfully reaped the benefits of strong athletic trends.

Now, experts say the evidence is mounting that Foot Locker’s struggles indicate a larger issue with the athletic industry and its longtime leading brand.

The athletic industry [is slowing down and] has been soft since the beginning of the year,” said Matt Powell, a sports-industry analyst with The NPD Group. “It’s still trending much better than dress and casual, [but] Nike sales have remained soft. Nike has not made the pivot from performance to sportswear, and its basketball sales are particularly challenged.”

Similarly, Canaccord Genuity Inc. analyst Camilo Lyon said in a note today that he believes an all-around “athletic malaise” is “largely promulgated by Nike’s innovation lull and ensuing aggressive promotional stance.”

Simply put, it is crippling retailers,” he added. “To make matters worse, it appears that some of the top performing platforms until recently (Roshe, Hurache, Jordan Retro) are slowing at a much faster rate than previously anticipated, requiring more aggressive promotions to move slower turning inventory, likely leading to a marketwide step up in promotions in the 2H17.”

Lyon further cautioned that he does not expect the athletic space to show “any signs of stabilization until we see meaningful innovation out of Nike,” which he believes will take another 9 to 12 months.

Foot Locker chairman, CEO and president Dick Johnson also suggested that athletic retail sales declines are largely attributable to a lack of exciting product — but spread his concerns across multiple athletic brands.

Reflecting the increased pace of changing consumer influences, sales of some recent top styles fell short of our expectation,” Johnson told investors during an Aug. 18 conference call. “In North America, for example, the sell-throughs of certain Jordan models slowed considerably compared to historical rates. In Europe, we planned certain Adidas Original styles — such as Superstars and Stan Smiths — down substantially, but they declined even more than expected.

He added, “At the same time, we were affected by the limited availability of innovative new products in the market. The old multiseason’s seed, ignite and rollout of cheap footwear platforms just doesn’t work as effectively anymore.”

Following Finish Line’s negative pre-announcement Monday and a downgrade of Nike stock by Morgan Stanley on Tuesday, a slew of athletic stocks have been battered.

Nike ended the trading day down nearly 2 percent, to $52.73; Under Armour’s shares closed down almost 3 percent, to $15.34; Foot Locker ended down 1.5 percent, to $35.16; and Finish Line was in the red more than 18 percent, to $8.50. Dick’s Sporting Goods also ended the day down 1.6 percent, to $26.52.

Still, all is not lost, according to Powell.

It’s always about great product,” he said. “If brands make what kids want, the business will bounce back.