S&P Global Ratings downgraded debt ratings on Nike Inc. as the company pulled its financial guidance for the fiscal year ending May 2025 and postponed its investor day amid a strategy shift and CEO transition. The ratings agency added, “These combined announcements signal that it may take longer for the company to remedy strategy misses, maintain brand relevance, and restore revenue growth.”
S&P revised its Nike debt ratings outlook to negative to account for revenue and profitability declines of its three key multibillion-dollar sneaker franchises. However, S&P noted that Nike’s credit metrics remain strong because of the company’s high cash balance. S&P nonethless added, “We still believe operating performance could deteriorate further or financial policies could change given its circumstances and a new CEO.”
S&P also affirmed all of its ratings on Nike, including the ‘AA-‘ issuer credit rating and unsecured debt ratings and ‘A-1+’ short-term and commercial paper ratings.
The negative outlook reflects that ratings could be lowered over the next two years if the company’s revenue continues to decline and the Nike brand loses more market share, relevance, and equity with consumers due to its inability to remedy its go-to-market strategy.
S&P said in its analysis, “Nike’s revenue will decline further than we originally forecasted as the company accelerates its strategy shift to remain competitive in sneakers. The next year will be a transition year for Nike as it reduces sales of some of its largest franchises, Air force 1, Air Jordan 1, and Dunk, where demand has waned–primarily on its digital platforms to make space for new innovations. Over the last few years, Nike saturated the market with too many varieties of these franchises, lowering consumer interest and sales. While over the last few years the strategy generated good cash flow in the short term, it came at a cost of innovations and defending market share against newer entrants. Nike will now pivot to pushing-forward innovations in lines such as Pegasus, for running and lifestyle, to help reignite growth and a renewed focus on sport.
“However, this will not be visible in its operating results given the size of the three franchises the company is de-emphasizing. The reduced sales, combined with weak global macroeconomic trends that are more pronounced in China, will decrease revenue in our base case forecast near 7 percent in fiscal year 2025, which is lower than our recent forecast of a 5 percent decline. We expect the company to be more promotional to clear the inventory of these franchises, which will impact both revenue and EBITDA. We lowered our EBITDA forecast by $1.7 billion to $6.9 billion from $8.6 billion year over year to account for these changes.
“Nike is pivoting back toward an omnichannel-focused approach and away from its former target to have 50 percent of sales come from the digital channel. In the first quarter, Nike’s sell into the wholesale channel was flat, which could indicate less willingness from wholesalers to allocate shelf space back to Nike. However, the company announced a restored relationship with Foot Locker on basketball shoes. Foot Locker was heavily indexed with Nike prior to its decision to focus on its own brick and mortar and digital e-commerce channels and replaced Nike with other brands over the last year and half. Nike plans to have more innovative products under $100, another area the company had pulled away from. It plans to invest in merchandising with its strategic wholesale partners, such as Dick’s Sporting Goods, to drive brand awareness so consumers can maintain a relationship with the brand and see the new innovations in a physical setting.
“Nike remains the No. 1 sportswear company globally, but the competitive landscape is changing and increasingly more fragmented. Nike is the clear leader in sportswear, with about 18 percent dollar share globally, which is more than double Adidas’ 8 percent share, according to Euromonitor. Nike as a company, which includes Converse and Jordan brands, holds 21.5 percent market share in footwear in the U.S., which is significantly above 5 percent for Adidas and 4 percent for Sketchers. However, in comparison, Adidas expects sales to grow 10 percent, while Nike’s revenue declined 10 percent in the first quarter.
“Nike also faces pressure from newer entrants OnRunning and Hoka, (specifically in the running category over the last few years), as technology has lowered barriers to entry and social media’s lower marketing costs and its reach is greater than traditional advertising. Notably, Lululemon has climbed into the No. 5 market share position from No. 14 pre-COVID-19 pandemic, while Under Armour and Vans also have fallen. We will monitor the success of Nike’s strategy shift, the sustainability of its market dominance, and emerging competitive threats.
“Nike’s CEO change came on the heels of its strategy pivot and operating underperformance. John Donahoe, Nike CEO since 2020, is retiring and has been replaced by former company leader Elliott Hill. Notably, Mr. Donahoe was not on the first-quarter earnings call to transition the position to Mr. Hill, which raises questions over the current state of the management at Nike. The lack of visibility into this year’s guidance could indicate that Nike’s strategy shift could accelerate under Mr. Hill and result in further near-term profit declines. Mr. Hill retired from Nike in 2020 after 32 years with the company, holding the position of president-consumer and marketplace from 2018-2020. Mr. Hill will be tasked with executing on winning back market share lost to competitors that filled shelves left by Nike’s vacancy.
Specifically, Nike has lost its footing in the specialty running category, losing market share to newer entrants Hoka and OnRunning, and legacy competitors Adidas and New Balance have retained their positions in the lifestyle category. To reflect the strategic miss and abrupt CEO change, we revised our management and governance modifier score to neutral from positive, which currently has no ratings implications.
“Despite a downward revision to our base case, Nike’s credit metrics remain intact. The company’s trailing-12-month (ended Aug. 31, 2024) first-quarter leverage remains below 1x, mainly due to 90 percent of its $10.2 billion cash and short-term investment balance as of August 2024 offsetting its approximately $9 billion in funded debt balance. We estimate the company’s accessible cash balance represents its cushion to our 1.5x downside trigger. We forecast its leverage will remain below 1x despite reported EBITDA falling $1.7 billion year over year because of its strong net cash position.
“Given our lower sales and EBITDA forecast, we expect the company’s S&P Global Ratings-adjusted margins will decline to near 14 percent in 2025, down from 16.7 percent in fiscal 2024. Nike announced a restructuring program to fuel $2 billion in cost savings over the next three years. The company incurred costs of about $450 million in 2024, primarily associated with employee severance costs. The company identified potential areas of savings, which include stockkeeping unit reduction, automation, headcount reduction, and leveraging scale for efficiency. Additionally, the company could invest more in innovation and marketing to drive growth, which could offset profitability improvements.
“Furthermore, a weaker demand environment for footwear and apparel and the risk of tariffs on imported goods could weigh on Nike’s profitability. We note footwear is a lower-margin business than apparel and Nike’s S&P Global Ratings-adjusted margins typically fluctuate in the 14 percent-19 percent range. Nike’s S&P Global Ratings-adjusted EBITDA margins did reach 20 percent in fiscal 2021 as demand for its products were very strong coming out of the pandemic and consumers were willing to pay elevated prices, when travel and services were still depressed.
“Our base-case forecast assumes Nike will continue with its current financial policies and capital allocation strategies. We project the company will generate free operating cash flow (FOCF) near $4 billion for fiscal 2025, which is down from $6.6 billion in 2024 and a direct result of the decline in profitability. We still expect the company will spend the majority of its FOCF on dividends of $2.4 billion and share repurchases of at least $4 billion. Nike’s 2.4 percent $1 billion notes will mature in March 2025, and it has approximately $1 billion of debt maturing in 2026 and 2027 each. The company has not laid out specific refinancing plans, but it has $8.5 billion in cash, which could easily cover these maturities. However, we note that its new CEO can change its capital allocation strategy.
“The negative outlook reflects that we could lower our ratings on Nike over the next 24 months.”
