Member Exclusive   //   July 2, 2024

DTC Briefing: Nike’s recent challenges can’t be entirely blamed on DTC

This is the latest installment of the DTC Briefing, a weekly Modern Retail+ column about the biggest challenges and trends facing the volatile direct-to-consumer startup world. More from the series →

Direct-to-consumer has been a scapegoat of sorts for recent poor performance from Nike. 

During its fourth-quarter earnings, reported on Thursday, Nike disclosed that revenue was down 2% year-over-year on a reported basis. A mid-single digit sales decrease is par for the course at some point for most brands. But, Nike also lowered its fiscal outlook for 2025, stating that it expects sales to be down mid-single digits. In other words, it only expects things to get worse. That’s led Wall Street to squabble over what exactly has gone wrong with Nike. 

According to some analysts and investors, the issue is that Nike invested too much, too quickly in DTC. One opportunistic class action lawsuit, filed in June, claimed that Nike CEO John Donahue and CFO Matt Friend misled investors about the success of its DTC strategy. And indeed, Nike has already seemingly walked back part of its Consumer Direct Acceleration (CDA) strategy. The CDA, generally speaking, caused Nike to invest more in its DTC channels and cut wholesale partners, and was something that was expected to be a key part of its growth. But last year, Nike started sending more inventory to partners it had previously deprioritizied, like Macy’s and DSW, a tacit admission that DTC was not enough. 

Analysts are divided on just how much of a role DTC has played in NIke’s recent challenges. Some say that yes, Nike cut wholesale partners that it shouldn’t have. But perhaps the bigger issue is that Nike has fallen behind in product innovation, ceding ground in categories like running to upstarts like Hoka and On, leading the Wall Street Journal to declare last week that “Nike missed the boom in running.” Meanwhile, sales of some of its classic footwear franchises have suffered. Others say that the bigger issue is that Nike has gotten rid of key talent in its shift to DTC.

What Nike’s shift to DTC has done is perhaps more quickly exposed the issues in its business. Any wholesale-reliant business can blame a decrease in wholesale sales on poor performance from one of its retail partners, or a lackluster display. But in a DTC business, brands live and die on their own terms. 

Sam Poser, an equity analyst at Williams Trading LLC, characterizes Nike’s recent challenges as “throwing the baby out with the bathwater.” Poser thinks that Nike’s decision to cut some wholesale partners that weren’t presenting the brand properly was a wise one. 

Nike’s focus on DTC started in earnest back in 2017, when it unveiled its Consumer Direct Offense (CDO) strategy. Then, when it met those goals, it built upon that with the CDA. Over the years, Nike has released more ambitious goals as it has sought to generate more and more of its sales from its own stores, as well as. For example, the CDO called for Nike to generate 30% of its sales from digital. Then, when it hit that target in the fourth quarter of its 2020 fiscal year – aided by the pandemic – it increased its goal to 50% digital penetration. 

The problem, Poser believes, is that in more recent years, as part of the CDA, the company got rid of “a lot of very tenured Nike people.” Last December, Nike said it aimed to identify $2 billion in cost-savings over the next three years,” and as part of that, had multiple rounds of layoffs. 

As a result, Poser said, Nike got rid of a lot of talent that had experience managing some of its classic franchises (Nike’s term for product lines) like Jordan and Air Force 1, and had deep knowledge of its supply chain. 

Friend, Nike’s CFO, said during the fourth quarter earnings call that a 10% decrease in Nike Digital sales was attributable to “softer traffic, higher promotions, and lower sales of certain classic footwear franchises.” But, he added “this is even as these franchises continue to drive retail sales growth at high full-price realization in multi-brand retail.” 

This indicates that Nike has a supply and demand problem. In turn, Nike said it planned to tighten the total supply of these franchises on Nike’s digital properties. 

Neil Saunders, managing director of GlobalData Retail, said that he believes Nike’s issues have been “exacerbated by the previous focus on DTC.” 

But, ultimately, he said “it doesn’t matter what your distribution strategy is, if you haven’t really got the right products and the right product strategy, you have issues.” 

More specifically, Saunders said he believes that Nike has fallen behind on technical innovation, and that other competitors like Hoka and On have done more to talk up innovations in their running shoes. 

For example, Saunders said that Nike’s competitors have done a better job of doing localized marketing – for example, partnering with local run clubs who can spread the word to other runners about which shoes look and feel better. The recent Wall Street Journal story interviewed local run clubs who said that they had been visited by representatives from New Balance, Hoka or Asics – but not Nike. 

Donahue alluded to challenges in running during the earnings call, stating that Nike has “been hustling to accelerate our running innovations and amplify our ground game.” What’s more, he said the company was focused on “making it easier for consumers to discover these styles by simplifying our running construct at retail as we highlight our best-in-class cushioning technologies.” 

Ultimately, it is going to take Nike some time to rebuild. Nike is projecting first-quarter sales to be down as much as 10% before seeing some improvement the following quarter. That creates an opening for every talking head to proclaim that they know how to fix Nike. 

Still, Saunders said that Nike “is the predominant force in sneakers and sportswear.” 

“What has disappointed investors is the relative and consistent underperformance and that’s what they have to remedy,” he said.

What I’m reading

  • M.M. LaFleur CEO Sarah LaFleur spoke with Retail Dive about why the brand is recommitting to its store fleet.
  • Levi’s CEO Michelle Gass said that growing interest in Western fashion is driving up denim sales for the brand.  Specifically, sales of denim skirts, jumpsuits and dresses all at least doubled in the latest quarter, Gass said.
  • Glossier is becoming the first-ever beauty partner for the USA women’s basketball team for the Olympics and Paralympics.

What we’ve covered

  • More brands like Glossier and the Honey Pot Company are also scoring WNBA partnerships.
  • How Shopify is betting on Shop Cash to get people to interact more with its Shop app.
  • Celebrity-founded brands including Naomi Osaka’s Kinlò and Thor’s Skyr, which counts actors Dylan Sprouse and Terry Crews as co-founders, are rebranding.