Nike's business is 'going to get darker before the dawn'

Nike is facing a scary time in its history.

The sportswear giant announced earnings on March 21. The company’s sales and profits were hit by a slowdown in the retail industry. Sales growth for next quarter is looking bad, too.

This has analysts seeing next fiscal year as a “rebase year.” The company is now focusing on shifting away from wholesale, and to building its direct-to-consumer infrastructure. As Nike shifts to focus on both direct to consumer and online, there is some expectation that it will be a rough time.

As Nike shifts to focus on both direct to consumer and online, there is some expectation that it will be a rough time.

“It’s going to get darker before the dawn” analysts at UBS wrote in the company’s latest research note to clients.

Much of the concern comes from the poor futures reported at negative 4%. This metric, which is mostly a measure of orders Nike had from retailers that it expected to fill in the next six months, were once a key metric of demand for Nike’s products when it was largely a wholesaler.

That’s the first time this metric has been negative in seven years, as the Wall Street Journal reported, citing Citi Research. Analysts chalk this up to the switch to direct to consumer, and the speed of its new supply line that can drop products to retailers much faster.

“We think there’s truth to comments that futures and revenues will remain less correlated as [Nike] rolls out product with lead-time of less than 3 months,” UBS said.

The broader retail climate will also act as a headwind as Nike tries to make its shift. Athletic footwear sales declined 14% in February comparing year over year, according to industry analysts the NPD Group. The classics category also showed a decline, which have been relative strong points in relative quarters, as well as the running category.

Nike has also lost some market share to rival Adidas in the US, which has been resurgent in its push to capture more of the North American market.

Still, investors did not significantly change their outlook for the brand going forward. They expect to see a likely turnaround in the new quarter or two as Nike emphasises speed in its supply chain and speed up bringing its product to market, and doubles down on innovation like an improved cushioning system for running shoes to compete with Adidas.

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