Nike sinks 12% after it slashes sales outlook, unveils $2 billion in cost cuts

Nike has revealed plans to cut costs by approximately $2 billion over the next three years, resulting in a 12% decline in its stock during premarket trading. The company has revised its full-year reported revenue outlook to approximately 1%, down from the earlier projection of mid-single-digit growth. The current quarter’s reported revenue is expected to be slightly negative, with low single-digit growth in the fourth quarter.

The decision to reduce costs is attributed to increased macroeconomic headwinds, particularly in Greater China and EMEA, according to Nike’s Chief Financial Officer, Matthew Friend. The company highlighted risks such as a stronger U.S. dollar affecting foreign currency translation, consumer demand over the holiday season, and challenges in the second half wholesale order books.

Despite the sales outlook adjustment, Nike maintains its expectations for gross margins to expand between 1.4 and 1.6 percentage points. Excluding restructuring charges, the company anticipates meeting its full-year earnings outlook.

As part of the cost-cutting plan, Nike aims to simplify its product assortment, leverage technology and automation, streamline the organization by reducing management layers, and drive greater efficiency through its scale. The company plans to reinvest the savings into fueling future growth, accelerating innovation, and ensuring long-term profitability.

The cost-cutting initiative is expected to incur between $400 million and $450 million in pretax restructuring charges, primarily related to employee severance costs, to be realized in the current quarter. Nike’s recent strong earnings beat during its fiscal second quarter indicated that cost-saving measures were already in progress.

This announcement follows a series of divisions experiencing cuts earlier this month, as reported by The Oregonian, including recruitment, sourcing, brand, engineering, human resources, and innovation. Nike’s gross margin, which had declined for the past six quarters, saw a turnaround, increasing 1.7 percentage points to 44.6%.

While Nike acknowledged challenges in the overall promotional environment, the company reported that the average sales price of footwear and apparel increased during the quarter, with strategic pricing actions and lower ocean freight rates contributing to the gross margin improvement.

Investors are keen to understand Nike’s expectations for the crucial holiday shopping season, and despite the sales miss and cost-cutting focus signaling demand challenges, CEO John Donahoe remains upbeat about the company’s performance during Black Friday week. Additionally, China’s economic recovery and its impact on Nike’s sales are closely watched, with the region’s growth falling short of expectations in the recent quarter.