Facing modest revenue growth and lowered future projections, sportswear titan Nike has unveiled a bold $2 billion cost-savings plan, igniting both excitement and caution in the athletic apparel industry. This ambitious initiative, announced alongside Q2 earnings, signals a strategic shift for the global giant, prioritizing focused growth, operational efficiency, and a renewed commitment to innovation.
On Friday, the stock dropped almost 12% in premarket trade. As of Thursday’s close, Nike’s share price has increased 4.7% so far this year, significantly less than the S&P 500’s annual gains. In extended trading, Foot Locker, a retailer that mostly sells Nike merchandise, saw a decline of almost 8%.
The concept is based on four main pillars: using economies of scale, adopting automation, streamlining product offers, and optimizing internal structures. Nike wants to increase productivity and consumer happiness by streamlining its extensive product portfolio, getting rid of duplication, and concentrating on its best-selling lines. Enhanced automation holds the potential to generate cost savings in transportation and manufacturing, and organizational simplification will reduce overhead and boost profitability. Finally, Nike hopes to leverage its enormous worldwide reach to take advantage of its size and brand power by negotiating better prices with suppliers and allocating resources optimally.
As an example, the corporation paid between $200 million and $250 million in severance payments when it cut 700 jobs in 2020.
This indicates that the current quarter, which ends on February 28, 2024, will be a bloodbath for Nike’s approximately 83,700 global employees.
Nike expects the plan to generate up to $2 billion in cumulative savings over the next three years, potentially lifting profitability.
Analysts acknowledged the potential benefits of increased efficiency and operational cost reduction. A leaner operation could enhance profitability and provide resources for reinvestment in key areas like innovation and direct-to-consumer channels.
However, worries lingered alongside the possible advantages. Investors questioned the plan’s efficacy, especially in a market where innovation and agility are critical in a highly competitive environment. Relying too much on automation may cause worries about job losses and its effects on manufacturing areas, while streamlining product offers may run the risk of offending some client segments.
“Since fiscal ’19, our investments in accelerating Nike’s consumer direct vision have created new operating capabilities, added tens of millions of new members to our member base and delivered a return of more than $12 billion of incremental revenue,” Chief Financial Officer Matt Friend said on a call with analysts Thursday.
“Looking to the balance of the year, we expect Q3 reported revenue to be slightly negative as we again compare to double-digit growth in the prior year and Q4 reported revenue to be up low single digits, with full-year reported revenue now growing approximately 1%,” Friend said.