New Nike boss could consider becoming Big Sneaker
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Jennifer Saba
NEW YORK, Oct 18 (Reuters Breakingviews) -Nike NKE.N boss Elliott Hill might want to lace up his deal boots. The incoming chief executive took the top seat at the $126 billion athletic shoe maker this week as it confronts a host of challenges including a weakened consumer, mismanaged distribution, and a saturated market. Hill can try and design his way out of the mess or take a bolder step – perhaps through a tie-up with rival Adidas ADSGn.DE.
Nike is reeling from several problems. The Beaverton, Oregon company said earlier this month that sales for the quarter ending August fell 10% year-over-year. Hill’s predecessor, former eBay boss John Donahoe, tried to sidestep third party sellers like Foot Locker FL.N in favor Nike’s own stores. That has turned out to be an inefficient strategy: Nike's operating margin is at the lowest level since 2002 outside of Covid, notes TD Cowen.
A harder fix facing Hill is to reposition Nike as a purveyor of cool kicks. More nimble rivals such as Decker Outdoor’s DECK.N HOKA and Switzerland’s On ONON.N have caught fire. In the United States, Nike’s market share has slipped from 9.5% in 2014 to 7.5% in 2023, according to Euromonitor.
Deals in the sector are rare and not always successful. Cultural clashes between creative divisions are common. Nike bought Converse in 2003 for $305 million, yet that brand is still a tiny sliver of the top line. But there are reasons for Hill to act more ambitiously now, namely that consolidation is a useful remedy in a concentrated market.
Plus, cost savings are a huge bonus in the absence of growth. The $46 billion Adidas, which has suffered from setbacks such as a disastrous partnership with Kanye West, is relatively inexpensive worth about 14 times the next 12 months EBITDA, according to Visible Alpha, versus Nike which is valued at more than a fifth more on the same metric. The two companies have many similarities, and a deal could save on factory duplication and supplies. Say Nike could slice nearly 30% of the Samba-maker’s total operating expenses — approximately $11 billion last year – and spare its marketing budget. Taxed and capitalized on a multiple of 10, synergies would be worth nearly $23 billion.
If Nike were to offer a 30% premium to Adidas’ current price, it would still have a claim on roughly two-thirds of the company - and the cost savings associated with that stake. Immediately it would be worth more than a tenth of its current value. Hill’s climb up Mount Big Sneaker may not be so steep after all.
Follow @jennifersaba on X
CONTEXT NEWS
Nike veteran Elliott Hill replaced on Oct. 14 John Donahoe as president and chief executive.
Nike on Oct. 1 reported that revenue for the quarter ending August fell 10% year-over-year to $11.6 billion. Earnings dropped 28% to $1 billion.
Nike falls behind https://reut.rs/4dBWCUV
Adidas's valuation is signficantly lower than Nike's https://reut.rs/3Abzrmw
Editing by Lauren Silva Laughlin and Pranav Kiran
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