Nike Inc. is expected to report fourth-quarter earnings on June 29, just a couple of weeks after announcing a major reorganization that includes a 2% workforce reduction and a focus on enhancing its direct-to-consumer sales.
The company’s new alignment will focus on 12 cities, including New York, London and Shanghai, which are expected to represent 80% of the company’s growth through 2020. Nike NKE, +0.19% plans to bring more innovation more quickly to the consumer, part of a strategy for a “consumer direct offense.” The new Nike Direct organization will combine the website, direct-to-consumer retail and Nike+ digital products to enhance membership.
Nike discussed its “edit to amplify” approach during the third-quarter earnings call, saying that three-quarters of the company’s styles are responsible for 99% of sales.
“By editing out 25% and amplifying the productivity of both new innovations and the products consumers already love, we’re driving more growth and choice from fewer styles,” said Nike Chief Executive Mark Parker on the call, according to a FactSet transcript.
The plan is one that has the ultimate goal of connecting with customers more closely, said Jared Wiesel, partner at Revenue Analytics.
“With consumers shifting online, Nike’s strategy is easier to accomplish because they are not as reliant on a large retail footprint, and they have better control over their brand and customer experience versus when a product is sold through another retailer’s website,” he said.
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Nike is following in the footsteps of other brands that are pulling back from third-party retailers. Coach Inc. COH, +1.86% and Michael Kors Holdings Ltd.KORS, -0.06% are two examples of companies that have said they’re reducing their presence in department stores. Retailers will have to change their strategies as well, according to Tiffany Hogan, senior analyst specializing in U.S. apparel retailers at Kantar Retail.
“Retailers are fighting for exclusives,” she said, noting that the impact on retailers won’t be uniform, as some will have a little more leverage. “The partnership will have to strengthen even if the presence in the stores will have to lessen,” she said.
Major retailers for Nike, like Foot Locker Inc. FL, +0.77% and Dick’s Sporting Goods Inc. DKS, -3.84% “might have more eggs in the basket,” while department stores are trying to get more athletic wear on their floors.
Retailers including Macy’s Inc. M, +0.05% , through its partnership with G-III Apparel Group Ltd. GIII, -2.18% for DKNY apparel and accessories, and J.C. Penney Co. Inc.JCP, -0.46% with its agreement with Libby Edelman, are looking for unique merchandise to drive traffic to its stores.
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“Retailers are going to have to get smarter and come up with something exclusive,” said Judge Graham, chief marketing officer at Ansira, a digital and customer-relationship management agency. “Foot Locker will have to be proactive and innovative to bring ideas to Nike. Nike doesn’t want to lose that channel, but the scales are shifting to direct-to-consumer.”
Nike plan to sell directly through Amazon.com Inc. AMZN, +0.03% could be bad news for some retailers, particularly J.C. Penney and Kohl’s Corp. KSS, -0.03%
“While competition is competition, should Nike form a strategic alliance with Amazon, one of the big national brand traffic drivers today for both Kohl’s and J.C. Penney would be impaired to some degree,” wrote Gordon Haskett Research Advisors in a Wednesday note.
Christopher Svezia, senior vice president at Wedbush, says Under Armour Inc.UAA, -0.54% and Adidas AG ADS, -0.67% , key rivals to Nike, are also turning to their own channels. But the oversaturated athleisure landscape is a factor.
“Everyone has a pair of black stretch pants or a black stretchy top,” he said, referring to retailer offerings but applicable to consumers as well. “Athletic has become dilutive. If I’m Nike, I need to come up with the next innovative thing.”
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Here’s what to expect:
Earnings: Analysts polled by FactSet expects earnings per share of 50 cents.
Estimize, a software platform that crowdsources estimates from buy-side analysts, hedge-fund managers and others, expect EPS of 52 cents.
Revenue: The FactSet sales consensus is $8.63 billion, while the Estimize estimate is $8.66 billion.
Stock reaction: Nike shares are up 3.5% for the year so far, but are down 9.3% for the last three months. The S&P 500 index SPX, -0.06% is up nearly 4% for the past three months.
What to watch for:
Cowen & Co. checks on Nike show continued promotions across shoes and apparel in North America, its analysts said in a Tuesday note. Adidas is narrowing the sales and margin gap with Nike through increasing space in the wholesale channel, inventory management and other factors.
Cowen & Co. rates Nike shares at market perform with a $53 price target.
Bankruptcies and store closures across the sporting goods space are also having an impact.
See also: How retail bankruptcies took their toll on Under Armour in latest quarter
“Nike stands most exposed in our coverage to the retail consolidation underway, losing 300-plus points of distribution year to date alone on our math,” wrote J.P. Morgan in a Friday note.
Analysts downgraded Nike to neutral from overweight, citing “multiple model constraints,” from slowing growth in North America to less shelf space at retailers. The price target was cut to $58 from $61.
“In thinking about how long it will take Nike to fully course correct, we continue to view spring 2018 as the earliest when it might begin to show signs of recovery,” wrote Canaccord Genuity analysts in a Thursday note. “The complexity lies in the fact that Nike is not acting in an Adidas-less vacuum. Adidas is on trend, in high demand, and getting stronger, which likely complicates or prolongs Nike’s recovery.”
Canaccord rates Nike shares hold with a $51 price target.