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- [00:03]
A
It's going to take some time. I just think what's happening with the stock price over the last couple years is Wall street realizing that the turnaround and the amount of time that Nike needs to get back to being the company that people expect it to be is. Is a lot more than what people thought, say, a year or two years ago.
- [00:20]
B
Hi, it's Jack Howe, and this is the Baron Streetwise podcast, the voice you just heard. That's Jay Soul. He's an analyst at ubs. He covers footwear. We're talking about Nike. That stock is down from a peak of over $170 a share to a recent price in the 40s. It's an opportunity to buy one of history's great growth stocks when it's way down. But the problems for Nike might run deeper than they appear. We're going to talk in this episode about why its turnaround has been elusive and why stock buyers should be cautious until they see more signs of progress. That's next. I am wearing, at this moment, machine washable sneakers. Not that I have washed them in the machine. I don't bother because they were so cheap. They were 45 bucks. And I have a stack of boxes in my closet. I have about, I'm gonna say, like, four pairs lined up for me. When this pair gets dirty, they slip on. I don't have to tie laces. At first I told myself I'll just wear these around the house. But we're way past that now. I guess I won't tell you the brand, but it makes a statement. And that statement is, don't judge me for my fashion, because I've clearly given up. I'm out of the game. I tell you this to say that I'm not the guy to explain the finer points of where Nike is missing on shoe design. But we're going to hear from some people in a minute who can help us with that. We'll hear from a Wall street analyst who is skeptical and a shareholder who's a believer. And we'll hear from a couple of passionate sneaker heads. Those are people who are really into sneaker culture and design, and they collect sneakers. I don't think my boxes in the closet count. Nike's had a new CEO since October 2024. His name is Elliot Hill. He's a company lifer who was brought back from retirement to set things right. But the stock has continued to decline. It was recently trading at a price that investors could have paid almost a dozen years ago. And to my eye, there are Two more problems. Although the shares are cheaper, I wouldn't say they're trading in a deep and obvious discount. They're about 24 times projected earnings for the company's fiscal year ahead. A bounce back in earnings would certainly help, but estimates for earnings in coming years have been slipping. And the second problem is that CEO Hill is really already doing the things that investors are demanding. They want the company to refocus on performance shoes after years of shuffling along on casual designs. And they wanted to repair relationships with stores after what you would have to call an arrogant move online. There are some signs of success, like a modest rebound in North America. But that hasn't been enough for the shares. There are bigger problems at work here. A plunge in demand from China is one of them. We'll come to that. There are also questions about whether Nike has lost its marketing edge. There seems to be a shift going on in the phenomenon that brought Nike dominance to begin with. Basketball stardom. We'll come to that too. An investor who's been in Nike stock from the very beginning has no regrets. Shares went public at 1980 for 18 cents apiece, adjusted for splits. And if you held out, you could have gotten an even better price. On October 26, 1984, you could have paid 12 cents a share. I mention that date because it's a day that Nike gambled a then unheard of $2.5 million on a five year shoe deal with a college basketball star who hadn't yet played a day in the pros. His name was Michael Jordan and the pact was so transformative for Nike that Ben affleck made a 2023 movie about the executive who landed it, called Air and starring Matt Damon.
- [04:25]
C
This is the biggest deal this company has ever offered anyone by far. Michael could blow out his knee next week.
- [04:34]
B
You have to picture schlubby looking middle aged office worker Matt Damon. Not Jason Bourne. Matt Damon. It's one of my favorite sneaker endorsement deal movies. The thing about Jordan is not just that he won six championships with the Chicago Bulls in the 1990s or that he thrilled fans with his soaring dunks. The 90s were the twilight of monoculture. Consumers were watching the same television shows and reading the same magazines. This was before the Internet had splintered audiences. 1992 Olympic Dream Team showed Jordan off to an adoring world. Does everybody know what a Q score is? It's a proprietary measure used in marketing. It's based on both celebrity reach and popularity. And if you're a celebrity with a q score over 20? That's excellent. If you get to 40, we're talking rare, generational pop star Jordan hit 56. In other words, everyone knew him and everyone liked him. And he made Nike the place to be for top athletes. Today, Nike's Jordan brand is like a company unto itself, and the fiscal year ended May 2025, it did $7.3 billion in sales. That's 15% of the company's total. But that dollar figure was down a painful 16% from the year before. So what's going wrong? For years, the Jordan brand generated hype through limited releases and instant sellouts of retro shoes, which sneakerheads would then trade on secondary markets. But during the pandemic, Nike flooded the market. It created an easy boost for sales and profits, but it also suffocated hard won hype. And there were two disastrous things that happened at the same time. Something called Nike's Consumer Direct Acceleration strategy under previous CEO John Donahoe involved cutting ties with middling shoe retailers and reducing allocations to longtime partner Footlocker. That was so that Nike could sell more shoes online for a higher cut of profits. Meanwhile, consumer preference abruptly shifted away from bulky basketball silhouettes toward running aesthetics, especially dad shoes and tech wear. New Balance, Hoka and on surged. Stores that had been spurned by Nike were happy to give them shelf space. If there's a measure that sums up the situation beyond Nike's stock price, it might be operating margin that averaged 13% over the decade through May 2024. It's projected to dip below 6% for the year ending May 2026. And part of that decline is necessary medicine. CEO Hill has pulled back on Jordan retro models along with an oversaturated basketball low top turned lifestyle shoe called Dunks. And he's making amends with retailers. That has involved accepting humbler economics. The bull case on Nike and by the way, fewer than half of Wall street analysts today say to buy the stock. That compares with more than 3/4 back at the 2021 peak. The bull case is that margins will revert back to normal once Nike regains its footing. But UBS analyst Jay Sol is not so sure. For one thing, double digit margins for sneaker giants are unusual. Adidas had an 8% margin last year. Puma and Under Armour were lower than that. Also, it's unclear how much Nike needs to shrink to grow. Sol says that sportswear, including apparel, has recently been half of sales. The company had once said that it should never be more than 30%. A percentage this high risks spending down brand equity that was built with performance shoes and cultivating a customer base of trend followers, not brand loyalists. Sol wonders whether Nike has lost what he calls its superpower.
- [08:46]
A
Well, the superpower is that Nike has this unbelievable ability to be all things to all people. And for most brands, they can't do that. Really what brand marketing is all about is identifying an underserved niche in the market and then really catering specifically to that group. Because, you know, the broader your brand is, the less directly and specifically you can speak to an individual. So what you really try to do is you try to be an expert in your narrow market and really just be that. And that's how you can create a, you know, a real defined image and, you know, have a business. But Nike was always just because they were the best sports brand and, like, they're the, you know, they're the winningest sports brand. People just, you know, responding. All types of people responded to possibly that. We've done consumer surveys over many, many years, and if you give people a prompt and you say, nike is a brand for me, and then you ask people to either agree or disagree with that statement, like, 95% of people would agree with that statement. And what's amazing about that is no other brand would get more than, like, 60%. And it's hard to be more than that. But Nike, being everything, was how they got to be, you know, 45, $46 billion business because they didn't have any limitations, their superpowers, that they could serve, you know, men and women. They could serve old people and young people. They could serve the suburban kid and the urban kid. They could serve the tennis player and the golfer and the football player and the baseball player and the soccer player and everybody, you know, and everybody in between, they wanted to serve everybody. And yes, they would serve LeBron James and give him, like, the greatest shoe that you've ever seen. And it was going to have a lot of technical features in it. They're going to have to charge you 250 bucks for it. But then they could also give you a look, if you don't want to spend 250 bucks on a shoe, but you want a little piece of LeBron, just, you know, know when you put that shoe on, makes you feel good when you step out on your playground, they can give you that, too, for a more. A more, you know, a lower price that maybe is more affordable. But their ability to do that, I mean, they still have it. They just got to get back to caring about sports more than any other brand. And that's what they always were and that's what they still can be.
- [10:38]
B
I'm wondering if, if you know, what are the chances, is it possible that Nike could get back to the same level of profitability, the same type of margins that they had in the past? And you can weigh in on that, but I just wonder. It sounds like you don't think that they're on the totally wrong path with what they're trying to do. It sounds like you think that they're largely doing things correctly. Is the plan sufficient? And if you were running the show there, is there anything that you would do differently? Is there any, can you give us any kind of prescription, you know, some change, that change or two that you might make there?
- [11:12]
A
Jack what I would say is that margins to me is more of a Wall street concern. You know, for Nike, I think at the end they got to serve the consumer and for a period of time, if your margin would be lower than they, than you'd like, because you have to spend the money to sort of get back to where you need to be to be ahead of the competition. Now that's a hard thing for management to sometimes accept because, you know, obviously management wants us to help serve the shareholders to shareholders are important. But if you have a long enough time horizon, you know, in other words, if you view, you know, if you're, if you can take a five or ten year view, Nike's margin can absolutely get back to where they used to be. But you can't force it. You know, it has to be consumer driven. It has to be a byproduct of serving the consumer. And sometimes like, you know, you can't put the cart before the horse. You just have to spend and do the right things for a while until you get to the point where you can really leverage and get to the margins to where you want them to be. That might take time. And I think the point about the stock is that I, and you're right, I don't think they're doing the wrong things. I think what the, the disconnect between the stock price and sort of like the turnaround is just that what's in the stock price is an expectation that turn on will happen fast. Okay? And I'm saying, okay, it might not happen as fast as Wall street want. That's why we're not ready to stop to start recommend buying the stock yet. But they're doing the right things and eventually they're going to get there. So the only difference, the timing is really the difference. And I think what the market has come around to is realizing, okay, look, he's doing the right things, but you got to give him time here because it's not that easy to turn around a brand this big this fast. It's an amazing brand and it's given us as consumers all so much joy over the past, you know, 60, 70 years. Right. Like, there's just so much there to continue to work with.
- [12:44]
B
Thank you, Jay. If Nike's superpower is in question today, it might be partly because insurgent brands have carved out niches and also Nike's move back to retail has skewed toward lower priced channels. But there's something big, bigger and I think more intriguing that might be going on. Jay raised the subject in a recent report for investors. There's an NBA player called LeBron James. He's a household name, but he's also 41, which is unheard of for an active pro. So where is the next Jordan? Today's greatest stars don't seem to transcend basketball or even scream sneaker sales, this being the NBA playoffs. I definitely have thoughts on that subject. Let's take a quick break. I'll give you my brief thoughts on how basketball stardom has changed. And then we'll hear from a bull on Nike stock and a pair of sneaker heads. That's next after this break.
- [13:47]
D
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- [14:24]
B
Welcome back. We're in the midst of the NBA playoffs. By the time you hear this, I don't know if Wemby and the spurs will have pulled it off against Shea and the Thunder. It doesn't look great at the time of this recording, but let's see. And the Knicks are in the finals. That feels amazing just to say, but we're talking about sneaker sales, not sports nerd stuff. Let me see if I can make it make sense even for people who don't watch basketball. We talked about the worldwide phenomenon of Michael Jordan decades ago. You didn't have to be a basketball fan to know exactly who he was and what he was about. Today, the NBA's most valuable player of the past two years is a Canadian named Shai Gilgeous Alexander. He's obviously a very skilled player, a mid range sniper as they say, but he might be best known for drawing foul calls and sometimes drawing shouts of Flopper from the crowd. I have a hard time picturing a kid in the playground saying, hey, I got the new SGA Flopper Threes. Some people say the MVP should have gone to another player instead. Serbian big man Nikola Jokic stuffs the stat sheet, but he also has a dad bod and a lumbering gate. Nothing wrong with dad bods, mind you. Jokic displays so little emotion when he plays that fans joke about him showing up each season like it's a factory job when he'd really rather be back home tending to his horses. I've heard many conversations about Jokic. I've never heard anyone wonder aloud what he wears on his feet. Francis Victor Wembiama is young and very likable and he's so skilled that his nickname is the Alien. But another reason that's his nickname is because he's 7 foot 4 and that's a height that makes I want to be like Wemby, not ring quite the same as when kids used to say I want to be like Mike. About Jordan, who's 6 foot 6, how about a more relatable height, at least on an NBA adjusted scale? Rookie of the Year Cooper flag is 6 foot 8 and he's a niche marketer's dream, but he's a new balance man. I see a lot of incredible basketball talent, but I don't really see a Jordan in the mix. Let's hear more about the Bull case on Nike stock. For that I reached out to Chris Rossbach. He's chief investment officer at a bottom up asset manager called Jay Stern, and he says of Nike's turnaround efforts, they're doing the right thing and it's starting to work, at least in the U.S. north American sales last quarter increased 3% growth in footwear offset declines in apparel and equipment. Chris says Nike still needs more investment in innovation after a pandemic lullaby. He says what's mainly holding the company back now are overseas sales, especially in Greater China, which was down 7% last quarter, and that's after a 17% drop during the same quarter a year ago. But Chris says these problems are reflected in the shares, and he doesn't think the problems in China are because consumers there are turning against an iconic American brand or American brands in general, he says they're fixable. Hear part of that conversation with Chris now.
- [17:35]
E
In terms of what's been happening in the US it actually is not looking so bad. So you've had turnaround in a number of the franchises. You've had also an inflection in gross margins on an underlying basis. So in the US it's starting to work, although there's still a need for more innovation to come which I think is a result of the lack of investment post pandemic. I think in international it's starting to come through but the numbers clearly are still not very strong and there's clearly been major headwinds in China in terms of the need to realign the business. But I think in terms of the US and where they are furthest along, we are seeing signs that it is working with some of the layoffs that they've done and that's an announcement that they've made only this year. They're going to have a significant improvement in in their underlying cost base. They're also going to annualize the hit from the tariffs because it was a 650 basis point hit that they took as a result of the tariff because of where the shoes are manufactured. So that's another element that's led to the issues that Nike said that's annualizing. And then I think the World cup is coming up and the sell in helped in the last quarter but over 50% is still to come. And, and I hope that that's going to be a really positive event in the US and in North America. And so with the big franchise, Nike has seen that. We should see some positive news from that.
- [19:06]
B
Thank you Chris. Let's not forget the sneakerheads. They're on the front lines doing video reviews for like minded enthusiasts and helping to set the pace for what will become popular or not. Sean Gough says I'm just a guy that grew up a fan of Michael Jordan. He says Air Jordans were the way for me to connect with my favorite athlete of all time as why he thinks Nike is struggling now. He points to the example of the Air Jordan 40. That's a recently launched shoe that marked the 40th anniversary of the brand. It was designed as a performance shoe with a casual fashion look and it's $205 and it's not a runaway hit so far. Here's Sean.
- [19:51]
C
Nike's always been their bread and butter has always been tied to those historical retro sneakers.
- [19:59]
A
Right.
- [19:59]
C
You have the, the Air Jordans from when MJ played in the late 80s and early to mid-90s. And you have the legendary Air Max series, things like that. But when you look at what they're producing now, you know, the Air Jordans, Air Jordan 40 that just recently dropped, you know, it's a nice looking shoe, but you don't have people clamoring to buy it because one Michael Jordan's been retired for so long, the kids now and the athletes now don't have that connection to him as a player.
- [20:29]
B
What brands get people excited these days or models get people excited in basketball shoes these days? Can you give me any examples of innovations outside of Nike that, that people have got gotten excited about in recent years?
- [20:43]
C
Well, from a basketball shoe perspective, Adidas has done really well with Anthony Edwards and his tremendous success in the league and then even brands from China.
- [20:52]
B
Anthony Edwards is, I'm a tall fella in the ordinary world of people. I'm not, you know, I'm not like NBA height. Anthony Edwards is like not so exceptionally tall, but when he jumps, he, he leaves the ground in a way that allows him to hammer the ball through the rim with two hands and it's it like superhuman. He's, he's, he's quite something to see in action. So I could see how his shoes would get people excited. And, and he is, he's an Adidas guy.
- [21:22]
C
Yeah. So he, he's been doing really well. And Kyrie Irving went from Nike. And then like we're seeing these brands from China that are doing extremely well because from a performance standpoint, they're just really good shoes to wear on the court. Whereas we're hearing common complaints from Nike shoes that are just, they're too narrow. They, they, they break down really quickly. It's not just a lack of hype, but even from a performance lens, you're seeing that too. And from a lifestyle perspective like Nike has been so used to banking on hype, people wanting to resell the shoes, so on and so forth. But then as I'm sure your audience knows, with Nike trying to move direct to consumer, we're seeing less Nikes and Jordans at foot lockers and Dick's Sporting Goods and things like that. New Balances, Asics. A lot of even casual consumers are turning towards those brands because that's what's a available. They don't have to line up and jump through hoops to grab them. And also that's what they're seeing on the actual storefront.
- [22:22]
B
Sean is not nearly alone in praising Chinese sneakers. China's longtime Sneaker manufacturer that has now become an innovator. If consumers in China are starting to prefer domestic brands, it might not just be for nationalistic reasons, but for quality. Chris Chase is a lead reviewer for a YouTube channel called Wear Testers. He likes to focus on technology and he says he first got into sneakers through something called Nike Air. That's not a shoe, it's a technology. It involves pressurized nitrogen in a pouch embedded in soles. Today, Chris remains keenly interested in shoe technology. He was telling me about a review of was it a robo shoe? Something that tied itself.
- [23:10]
F
They had some auto lacing shoes that were inspired by Back to the future 2. When Marty McFly got dressed up in the, in the get up and hangs
- [23:21]
B
you upside down and ties your laces or whatever.
- [23:24]
F
Dead serious. They even made replicas of the shoe and some of them did auto lace. They sold for thousands of dollars. Most from like either rich folks or professional athletes bought them. But yeah, and then they made that technology smaller and slightly more affordable and they put it in a runner and they put it in a basketball shoe.
- [23:42]
B
Was it good?
- [23:43]
F
And no, it was awful. I'd like to tie my own shoes.
- [23:46]
B
I'll have to check that out or see, see what I can learn about it. But I am very interested in the subject of Nike so I'm glad that you mentioned them. I have been wondering about Nike's poor sales about, about declines in China. Tell me about those Chinese brands and what make, how do you judge the quality of those shoes? What do they look like to you and how do they compare with some of the, some of the big U.S. brands?
- [24:14]
F
It's, it's just really, really layered as far as their products go. Like I said, I've, I've worn them when they were really, really bad, where they were like, you know, like Walmart quality. And now it's. If it's not like right there with what you would expect a top tier shoe to be, it's exceeding that. And that's one of the weirdest parts about Nike is that when I used to buy their product as a middle schooler and as a high schooler, I used to buy what they would call like the team shoes or the takedown shoes. So there was the main signature, like an Air Jordan that I couldn't afford, but there was a shoe underneath it that was priced a little bit more affordably and it had almost as much tech, if not the same tech that the main shoe had. It just was priced differently for a different demo. And those were the Shoes that I would get nowadays. You compare those takedown models and I mean the takedown models are so cheaply made and so poor as far as like technology goes. And some of these signature athletes, like Devin Booker, who is very popular, has a shoe that has less tech in it than a takedown shoe did when I was in middle school. And it's just insane that like you can get a team shoe from Leaning or the Wade brand or Anto or whatever and they have all the same tech as their main shoes. And then some like the one things that you might be missing are like carbon plates, but outside of that, like it's got everything in there.
- [25:30]
B
Give me your best turnaround plan for Nike. If Nike's CEO called you today and he said, hey, look Chris, you know, we're, we're looking for ideas and I've seen you, you know, online and you're the guy and give me some, give me some things that I need to do right now to turn this thing around. What would you tell them?
- [25:48]
F
Bill Knight would say that every, everybody is an athlete. Like, like that was what their, their main goal was, was that they were fulfilling a need. Whether it was, you know, a tennis shoe, a basketball shoe. Even recently with, they had this program called Fly Ease. It was for people that were, you know, suffering from some sort of disability where they could not tie their shoe for some reason or another. So when we talk about like aut auto lacing would have been great for that. And then they had Fly Ease where it was a full zip up upper that was attached to a lace enclosure. And so it was an easy access item. And I have friends personally that like have cerebral palsy and things like that where those products were great for them. So it's, it's, it's those things where when they would see a hole in the market of something that genuinely needed to be filled, that's when you usually, you know, come out with some of your best stuff.
- [26:43]
B
Thanks so much for taking the time to share your perspective. I appreciate it. Nice, nice meeting you.
- [26:48]
F
You too. Thank you for having me.
- [26:51]
B
I do not have some larger overarching statement to tie a bow on the subject of Nike. I do have a tiny statement, however. The dividend yield is 3.6%. I mention that because I really don't know whether it's time to buy the stock here or not. Years ago I did a cover story for Barron's on Nike. I think the COVID line was something like just don't. And the gist was that the stock was down but that it was too early to buy and it wasn't because the stock went up a lot, but also maybe it was because now it's down a lot from that point. So whether I'm a good guy or a donkey depends on when you sold. I think I lean donkey. And with that I want to thank Jay and both Chris's and Sean. And I'm not going to thank Michael because I've lavished enough praise on the man. But Wemby, I like the cut of your jib, all 7 foot 4 inches of it, whether or not you pulled it off against okc. Thank you all for listening. I might break out a fresh pair of slip on sneakers to celebrate the moment. Who am I kidding? I'm going to ride with these ones for a few more weeks and luxuriate in the savings. If you have a question you'd like played and answered on the podcast, send it in. It could be in a future episode. Just use the Voice Memo app on your phone. Send it to Jack Howe. That's H o u g h ehairrons.com youm can subscribe to the podcast on Apple Podcasts, Spotify, wherever you listen. If you listen on Apple, write us a review. See you next week.
- [28:29]
A
Foreign
- [28:32]
C
hey, this is Telus Demos and I'm Miriam Gottfried.
- [28:36]
D
We're reporters at the Wall Street Journal and The hosts of WSJ's take on the week. It's a weekly show that gives listeners a leg up in the world of markets and investing.
- [28:43]
C
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- [28:55]
D
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