Nike has announced its plans to reduce costs by $2 billion over the next three years, leading to a drop in its sales outlook. The company’s stock fell about 10% after hours, following the news. This year, Nike shares have only seen a 4.7% increase, lagging behind the gains of the S&P 500.
In response to increased macro headwinds, particularly in Greater China and EMEA, Nike now expects full-year reported revenue to grow approximately 1%, down from a previous outlook of mid-single digits. The company also anticipates reported revenue to be slightly negative in the current quarter, and sales to be up low single digits in the fourth quarter.
Nike’s finance chief, Matthew Friend, highlighted a number of risks in the company’s operating environment, including the impact of a stronger U.S. dollar on foreign currency translation, consumer demand over the holiday season, and second half wholesale order books. In response to these risks, the company’s new outlook reflects the need for adjusted digital growth plans and the impact of a stronger U.S. dollar on second half reported revenue.
Despite these challenges, Nike still expects gross margins to expand between 1.4 to 1.6 percentage points, and to deliver on its full-year earnings outlook. As part of its cost-cutting plan, the company aims to simplify its product assortment, increase automation and leverage technology, streamline its organization, and reinvest the savings to fuel future growth, accelerate innovation, and drive long-term profitability.
To implement its cost-cutting plan, Nike will incur pre-tax restructuring charges of $400 million to $450 million, mostly related to employee severance costs. The company has already been making changes, quietly laying off employees across several divisions.
While Nike’s gross margin has declined for the past six quarters, the company reported a gross margin turnaround in the latest quarter, increasing by 1.7 percentage points. This was attributed to strategic pricing actions and lower ocean freight rates, partially offset by unfavorable foreign exchange rates and higher product input costs.
Investors are hopeful for positive news during the crucial holiday shopping season, as retailers have been facing challenges due to the Covid pandemic. Nike’s CEO, John Donahoe, expressed optimism regarding Black Friday sales, noting that the company outpaced the industry with close to 10% growth and had its strongest Black Friday week ever.
China is also a key part of the Nike story, as the region emerges from the effects of the pandemic. In November, retail sales in China climbed 10.1%, but the numbers were up against easy comparisons and were largely driven by car sales and restaurants. Nike’s sales in China fell short of analyst expectations, but revenue came in ahead in other markets such as North America, Asia Pacific, and Latin America.
The news of Nike’s cost-cutting plan and revenue outlook comes as the company continues to navigate challenges in the retail industry and macroeconomic environment. As the company works to address these challenges, investors will be monitoring its performance and recovery in the coming months.
In light of Nike’s announcement, it is evident that the company is taking proactive steps to address financial challenges and improve its long-term outlook. As the retail industry continues to evolve, Nike’s cost-cutting plan and focus on driving growth and innovation demonstrate its commitment to adapting to changing market conditions and maintaining its position as a leader in the industry.
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